Fitch Ratings does not expect the Indian government's increase in customs duties on steel imports to alleviate much of the pressure on Indian steel producers, which have been challenged by cheap imports and weak domestic demand.

The higher customs duties is likely to result in only a marginal increase (between Rs 500-Rs 1100 per ton) in the landed costs of imported steel products, which in the short term will help close the gap between domestic output and the cheaper imports. However, Fitch does not expect domestic steel makers' realisations to improve because steel demand continues to be weak, particularly as the economy moves into the low demand season during June-September due to monsoon rains.

The government increased the customs duty on long product to 7.5% from 5.5%, and on flat products to 10% from 7.5%. The new duties were announced on Jun. 17, 2015 and effective immediately. The increase in customs duties and the implementation of an anti-dumping duty on stainless steel are part of the government's measures to develop the manufacturing sector under its ''Make in India'' campaign.

The increase in duties will likely have a larger impact on imports from China. India's steel imports rose 71% to 9.3 million tonnes (mt) in the financial year ended March 2015 (FY15), data from the government showed, with most of the increase due to shipments from China (around 3 mt). The higher duties are not likely to reduce imports from Korea and Japan, which are generally of higher value-added steel and covered under free trade pacts.

The steep increase in imports and weak demand for steel have significantly impacted the profitability of Indian steel producers over the last two quarters. EBITDA margins of Steel Authority of India Limited (BBB-/Negative) and JSW Steel (BB+/Stable) narrowed to 8% and 13.4%, respectively in 4QFY15 from 10.9% and 17.4% in the previous quarter. Tata Steel (BB+/ Stable) margins for its Indian operation, which was also hurt by a temporary ban on iron ore mining, fell to 15.8% from 20%.

Indian steel consumption has remained muted with overall steel consumption growing only by 3.1% during FY15. However the consumption of carbon steel remained flat at 68mt during FY15. Fitch expects Indian steel demand to revive during 2HFY16, driven mainly by improvement in government infrastructure spending and better auto sales as consumer sentiment recovers.