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Fitch: Emerging Markets Iron & Steel Producers Resilient in the Downturn
added: 2009-05-25

Fitch Ratings has commented that despite an expected decline in 2009 iron and steel selling prices, as well as declining worldwide steel production, credit ratings and Outlooks of iron and steel producers in Brazil, China, and the CIS remain relatively stable, particularly in relation to their peers in developed markets. In its special report titled, "Emerging Market Iron & Steel: Surviving the Downturn", the agency compares how declining iron ore prices in this downturn will likely impact miners and steel producers, considering their different business profiles, and examines the impact on their credit profiles and ratings.

"The sharp weakness in the global economic environment from Q308 saw iron and steel producers rapidly losing pricing power with de-stocking exacerbating the downward spiral in demand for raw materials like iron ore. Despite sharp cuts in iron ore production, prices are still expected to fall," noted Su Aik Lim, Director in Fitch's Asia-Pacific Corporate team. "However, the ratings and Outlooks of most rated Emerging Markets (EM) issuers in the steel sector remain more stable than many of their developed market peers, with recent negative rating actions on ArcelorMittal ('BBB'/Stable), ThyssenKrupp AG ('BBB-'/Negative), Nippon Steel Corporation ('A-'/RWN) and JFE Holdings Inc ('BBB+'/RWN) reflecting ongoing weakness in demand in the global steel market," added Mr. Lim.

"Of the 'Big Three' iron ore miners, VALE will likely suffer the most because of its higher percentage of sales to the US and western Europe, relative to BHP Billiton and Rio Tinto which are more exposed to the Asian market," commented Joe Bormann, CFA, Managing Director in Fitch's Latin America Corporate team.

EBITDA margins of Brazilian and CIS iron & steel producers that are self-sufficient in iron ore are expected to decline more that those steel producers that purchase ore from third parties. However their absolute EBITDA margins will remain higher. Fitch expects 2009 average EBITDA margins of vertically-integrated Brazilian and CIS iron & steel producers to be 20% and 18%, respectively, compared to 12% for Chinese steel producers that do not own their own mines.

The agency also notes Brazilian and Chinese steel producers that have a higher proportion of flat products in their product mix will face greater pressure due to falling global demand for automobiles and export-oriented consumer products. Conversely, CIS producers with higher exposure to long products, or those with high exposure to the steel export market, will face overcapacity concerns.

Despite the weak industry outlook, most of the rated issuers within Fitch's EM steel coverage currently have Stable Outlooks, except for Ukrainian steel producers. "In May 2009, Fitch placed Evraz on Rating Watch Negative, reflecting the agency's concerns that the company's financial leverage may deteriorate," said Sergei Guishunin, Director in Fitch's Russian/CIS Corporate team.

Although Brazilian iron & steel producers are expected to see their EBITDA margins halved to 20%, "their credit profiles are supported by strong liquidity positions, cost-control measures and capex cuts," said Jay Djemal, Director in Fitch's Latin American Industrials team. "Rating Outlooks are Stable except for VALE which has a positive Outlook driven by its improving credit profile," he added.

Strong domestic market positions, material exposure to high value-added products, cost advantage in terms of raw materials, and potential state support underpin the credit profiles of the Chinese steel producers.

The mostly Stable Outlooks for EM steel producers contrast with the mostly Negative Outlooks for steel producers in the developed economies. This is mainly attributed to different market dynamics - particularly to the oligopolistic market structure of the Brazilian and CIS market, and reflects state support for the ratings of the Chinese steel producers. However, a more significant pace of economic contraction than expected by the agency may lead to changes in the Outlooks or ratings for EM steel producers.


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