The profit margins of Indian steel producers are likely to remain under pressure in the second half of the current year, according to the international credit rating agency Fitch Ratings. The agency attributed this pressure to the persistent increases in the cost of steel production and steel producers being unable to reflect the higher costs in their prices due to subdued demand from end-user industries amid the prevailing unfavorable economic environment.
Additionally, Fitch expects steel prices to soften in July through September 2012 as demand for long steel will decrease with the onset of monsoons and the consequent slowdown in construction activity. The agency's statement noted that "the risk of regulatory intervention on prices, given the government of India's priority to tackle inflation, continues to exist". The positive impact of softer iron ore and coking coal prices globally has been offset by a depreciation of the Indian rupee.
Fitch underlined that the 10 percent price hike in May this year by India's largest iron ore miner NMDC would increase the cost of steelmaking by 3-5 percent, adversely affecting steel producers that are not vertically integrated. However, integrated steel producers like Steel Authority of India Limited ('BBB-'/Stable) and Tata Steel ('BB+'/Stable) are unlikely to be impacted, given their captive iron ore mines.
Despite margin pressures, Fitch anticipates most of the rated Indian steel producers will be able to manage the short-term demand slowdown without a material weakening of their credit profiles, thus affirming the outlook for the producers in question as stable.