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Interaction | July 2013

mine Regulation has brought new challenges

Although the Supreme Court has lifted the ban on category-A and category-B mines in Karnataka, expect iron ore supply to ease gradually in the state as regulatory approvals are required before the miners could start the production, says Ashish Upadhyay, Director, India Ratings & Research, an arm of the Fitch Group, in an interview with Rahul Kamat.  

India Ratings & Research is a rating agency committed to providing the India's credit markets with accurate, timely and prospective credit opinions. It currently maintains coverage of corporate issuers, financial institutions, finance and leasing companies and urban local bodies and project finance.


When can we see the change in the overall rating outlook of the Indian steel sector?
 A stable outlook may result from a sustained improvement in the Indian macroeconomic environment, leading to a superior growth in steel demand from the end-user industries. Due to the continuous slowdown in the Indian economy, the demand for steel from automobile, white goods and capital goods will remain muted in H2FY13, except for the seasonal uptick during festivals.


What are the key factors that are affecting the sector?
 The demand slowdown from end-user industries is one the key factors affecting the sector. India's Gross Domestic Product (GDP) growth is decreased to 5 per cent in FY13 from 6.2 per cent in FY12, which is one of the lowest in the last decade. The prevailing high interest costs continue to stem the demand from the end-user industries. The Indian government's plan to invest Rs 1 lakh crore in the infrastructure sector could boost steel demand in the medium-term, provided it is timely implemented.


Various greenfield projects continue to suffer due to land acquisition, rehabilitation and resettlement issues. The Land Acquisition, Rehabilitation and Resettlement Bill and the Mines and Minerals (Development and Regulations) Bill, which could have alleviated these problems, are yet to be passed by the Indian parliament.


Securing of captive raw material linkages is also one of the biggest challenges faced by the steel industry. Regulatory intervention has thrown up new challenges of securing iron ore supply to those steel makers, who do not have captive iron ore mines. Although the Supreme Court has lifted the mining ban on category-A (with minor or no irregularities) and category-B mines in Karnataka, we expect iron ore supply to ease gradually in the State, as regulatory approvals are required before miners could start the production.


What will be the production target you see from category A and B mines?
 According to the industry sources, category A and B mines are estimated to produce about 22 mt to 25 mt of iron ore. This will provide some relief to those steelmakers and miners, whose margins have shrunk in the past 12 months. The total estimated requirement in Karnataka is 35 mt.


Do you think that the liquidity is a major concern for the Indian steel producers?
 The liquidity of most Indian steel makers has weakened in the FY13, due to lower profitability and high working capital requirements. A decline in iron ore and coking coal prices would have provided some respite; however, a more-than-expected weakening in rupee has already offset some of the advantages that could have accrued due to lower coking coal prices. The liquidity concern is further compounded by steel producers' expansions resulting in negative free cash flows.


The cost of funding working-capital requirements remains high. Bank credit to the iron and steel sector decreased 20 per cent YoY to over Rs 2,550 crore in the FY13. Moreover, the depreciation in rupee has raised the financial leverage of steel producers with significant un-hedged foreign currency liabilities resulting in limited financial flexibility. Given that the Indian steel industry is one of the largest borrowers from the domestic banking system, any limited availability of credit could further affect the liquidity of domestic steel producers.


Do you think that the pulling out of steel major like ArcelorMittal and Posco would affect the Indian steel production?
 The pull out by these two companies is neutral to the domestic steel sector in short to medium term, except for the negativity that it creates around investment climate in the country. Also, neither of the two projects had progressed much. However, the pull out is negative for the industry in the long term given the potential demand for steel in India remains intact. India's per capita consumption of steel is still low at 57 kgs as compared to the world average of 217 kgs.


What are your rating actions on some of the steel companies in India?
 In H1FY13, we took negative rating actions on four steel companies and revised the outlook on one to negative from stable due to their greater-than-expected liquidity issues and high financial leverage. However, the agency upgraded the ratings of four steel companies due to their improvement in credit profiles.


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