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H2 to be gloomier for local steel companies

KOLKATA: Domestic steel producers seem to be bracing for a worse-than-expected market scenario in the second half of the year (July-December '13) with a weak economic growth that has led to muted demand from auto and consumer durables, adding to their woes. 

India Ratings & Research has revised its outlook on Indian steel producers to 'negative' from 'stable' for July-December 2013. In its latest report, the agency has attributed it to worsening liquidity profile of rated issuers. The agency's rated steel producers include SAIL, 
Tata SteelBSE 1.80 %, Rashtriya Ispat Nigam, Uttam Galva Steels and Usha Martin. 

The agency said in its report that it expects domestic steel demand to remain muted in the second half of the calendar year. However, growth is likely to gain momentum in 2014 on the back of a recovery in economic growth and expected push in infrastructure investment by the India. Incidentally, the World Steel Association has forecast steel demand in India to grow at 5.9% and 7% in 2013 and 2014, respectively. Real consumption of steel in India grew at a modest 3.3% in FY13 against 6.9% in FY12 due to the slowdown in the end-user industries. 

Despite a fall in raw materials prices, India Ratings said it expects steel producers' profit margins in FY14 to remain broadly similar to the FY13 levels. This is mainly due to persistent high cost of steel production and steel producers' limited ability to pass it on to consumers. The government's proposed move to raise iron ore royalty to 15% from 10%, if implemented, could lead to a further 
squeeze on margins. 

Steel companies are also unable to raise prices in the domestic market due to the global nature of the steel market, which is currently affected by oversupply and weak demand.