A recent report by ratings agency Fitch Ratings, which has posted a “stable outlook” for the agency-rated Indian steel producers in the second half of 2012, has served to underscore the robustness of the domestic steel sector. The report has brought in an element of positivity to a sector which otherwise was slipping steadily in the first half of the year.
Fitch posted a stable outlook despite a slowdown in the growth of domestic steel demand. MetalMiner recently reported that India’s steel sector had been buffeted by shortages in raw materials because of the mining scam and an onslaught of cheap imports, yet the sector continues to hold promise for the remaining part of the year.
A weaker rupee, slowdown in overall economic growth and expansion programs are some of the factors that Fitch has spelled out as responsible for the recent performance of Indian steel producers.
Fitch expects steel demand growth to range between 6-7 percent for the entirety of 2012, with the pace of activity picking up from October post-monsoon. The proportion of stable rating outlooks in Fitch’s portfolio is 96 percent. Traditionally, in India, past trends show that steel consumption does show a rise in the fall, partly because of the re-start of construction activity, so Fitch is may not be that far off in its assumption.
India’s unfavorable macroeconomic environment is Culprit No. 1 for the demand slowdown. Fitch has predicted profit margins to remain under pressure in H2 2012, because of cost increases in steel production and steel producers’ inability to pass on the high costs to consumers.
The pressure, said Fitch, would be greater on non-integrated steel producers. However, most of the rated entities should be able to keep up with the short-term demand slowdown without a major weakening of their credit profiles.
In the ratings agency’s opinion, Indian steel producers will have to use “a prudent mix of domestic and international funding to contain interest costs.” The margin of companies producing steel through blast furnaces has been affected by a weaker Indian rupee, despite import price parity of Indian steel and a softening of international prices of coking coal.
Fitch expects the weaker rupee to raise the financial leverage of steel producers with significant un-hedged foreign currency liabilities. However, the financial leverage of rated entities should remain within their rating categories.
Most Indian steel producers are in expansion mode, resulting in negative free cash flows. The liquidity situation is aggravated further by persistent high interest costs resulting in weaker demand for steel from end-user industries. Any limited availability of credit could hurt liquidity — particularly of lower-rated issuers — as the Indian steel industry is one of the largest borrowers from the domestic banking system, according to the report.
Steel majors in India have been putting up a fight against low pickup of steel following a downturn in world economy, including India’s. As of early August, Standard & Poor’s had downgraded the world’s largest steelmaker ArcelorMittal’s long-term debt bonds to junk.