Despite the risk of a slowdown in the growth of domestic steel demand Fitch Ratings expects the outlook for the Indian steel producers to remain stable in 2012.

The ratings agency said demand for steel the from the automobile, white goods, construction and infrastructure sectors would continue to grow through 2012, though at a low rate of 6% to 7%.

Steel demand has a high correlation with growth in GDP, which is showing signs of a slowdown.

Fitch has already lowered its real GDP growth projections for India for the year ending March 2012 (FY12) and FY13 to 7.0% and 7.5% respectively, from 7.5% and 8.0% estimated earlier, driven by higher domestic interest rates and a weaker global economy.

Profitability margins of most Indian steel producers came under pressure in H1 FY 12 due to increases in input costs led by a disruption in coking coal supply. While raw material cost pressures may ease in the coming months, reduced steel demand is likely to constrain steel prices, putting pressure on margins.

The rising interest rate scenario in the country could increase the overall cost of funding new projects. Although the interest rate cycle may have peaked, Fitch expects the cost of funding the working capital requirements to remain high due to increased interest costs.

(Sourced from Reuters)