Tue, Jun 19, 2012 - Page 13 News List

China Steel’s credit rating lowered, outlook negative

COMBINATION OF FACTORS:Lackluster steel demand, overproduction in China and rising raw materials costs have impacted the profitability of Taiwan’s steel sector

By Kevin Chen  /  Staff reporter

China Steel Corp (中鋼), the nation’s largest integrated steelmaker, yesterday saw its credit ratings cut by Taiwan Ratings Corp (中華信評) amid concerns over uncertainty in the global steel industry and the Taiwanese firm’s financial risk profile.

Taiwan Ratings, the local arm of Standard & Poor’s Ratings Service, lowered its long-term corporate credit rating and unsecured corporate bond issue rating on China Steel to “twAA” from “twAA+,” with a “negative” outlook, the agency said in a press release.

“The downgrade reflects our view that China Steel’s business profile has weakened as stronger supplier power, intensifying competition and weak market conditions have weakened its competitive position and profitability,” Taiwan Ratings said, adding that the company’s financial risk profile has also weakened due to its rising debt leverage and weak cash-flow generation.

Costs of raw materials such as coking coal and iron ore have been rising for several years, putting pressure on China Steel’s profitability. As a result, the company has increased investment in overseas mines, aiming to achieve 30 percent self-sufficiency in raw materials within five years.

On April 27, China Steel announced it would invest A$305.2 million (US$310.3 million) in a 2.5 percent stake in the Roy Hill Project iron ore mine in Western Australia, which would help it secure 1.38 million tonnes of iron ore a year. In February, the company said it would pay Australian miner MCG Group A$102 million for a 10 percent stake in the MDL162 coal mine in Queensland’s Bowen Basin, providing it with up to 600,000 tonnes of metallurgical coal per year.

However, on Friday last week, China Steel said in a statement that it had scrapped the plan to invest in MDL162 after one of the mine’s shareholders — Peabody Energy Corp — exercised its priority right to increase its stake, while chairman Tsou Juo-chi (鄒若齊) told shareholders the same day that the company would continue to invest in overseas mines to lower procurement costs.

Taiwan Ratings said it did not expect the prices of major raw materials, particularly iron ore, to fall significantly in the short term.

“We don’t expect this effort to make any significant contribution over the next two to three years,” the agency said.

China Steel reported a net loss of NT$323 million in the first three months of the year following a net loss NT$573.4 million in the fourth quarter of last year.

Company executives and analysts have expected China Steel to swing to profit in the second quarter after the Greater Kaohsiung-based company reported a pretax profit of NT$1.056 billion for the third straight month last month.

Nonetheless, Taiwan Ratings said steel demand in the region would remain lackluster in the near term and persistent overproduction in China would continue to weigh down steel prices over the next year.

Moreover, China Steel’s weakness in product diversity would also make it more vulnerable than its regional peers to industry downturns, the agency added.

Shares of China Steel fell 0.88 percent to NT$28.1 yesterday before the ratings downgrade, compared with a rise of 1.76 percent on the benchmark TAIEX.

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