TRIS Rating Co., Ltd. has affirmed the company rating of Sahaviriya Steel Industries PLC (SSI) at “BB+” with “stable” outlook. The rating confirmation has removed the CreditAlert with “developing” implications placed on the company’s rating since 31 August 2010, following the announcement of SSI to acquire operating assets in the United Kingdom (UK). The rating reflects a strong domestic market position; a market protected by quotas and tariffs; and a strengthened business profile following the acquisition of Teesside Cast Products (TCP), an iron and steel plant in UK. However, these strengths are tempered by high competition, the cyclical nature of the steel industry, its exposure to volatile raw material prices, and a sharp rise in its debt level because of the TCP acquisition.
The “stable” outlook is based on the expectation that SSI’s operating performance will improve in the second half of 2011. In addition, the company is expected to maintain a sufficient level of cash to service its debt repayment obligations. The rating outlook could be upgraded should the company be able to smoothly manage its steel making facilities and reap the benefits of its vertical integration as planned. On the contrary, deterioration in its financial profile from either delays or additional costs at its steel making facilities will negatively impact its rating or outlook.
TRIS Rating reported that SSI is the major hot-rolled coil (HRC) producer in Thailand. Currently, there are three domestic manufacturers of HRC: SSI, G Steel PLC (GSteel), and G J Steel PLC (GJS). SSI is the market leader in terms of production and sales volume. Over the past few years, GSteel and its subsidiary, GJS, lost their competitive edges due to financial difficulties. In 2010, the combined sales volume of the two companies was approximately half of SSI’s sales volume in 2010. SSI’s market share in the domestic market in 2010 was 37%. However, should GSteel and GJS complete their debt restructurings and be able to resume normal business operation in 2012, they might pose a threat to SSI’s market share in the future.
Unlike integrated steel mills and mini-mills, SSI does not manufacture steel; the company processes semi-finished steel slabs into flat-rolled coils. However, after completing the acquisition of TCP in March 2011, SSI became an integrated steel manufacturer with an annual capacity of 3.6 million tonnes of steel slab. Nonetheless, this does not change the fact that the company still has to import slab for re-rolling. However, an acquisition is believed to enhance SSI’s business profile because SSI will be self-sufficient in terms of its slab requirements. This will benefit capacity utilization rates, sales volumes, and lead to sales of more value-added products. Having its own slab manufacture will also enable SSI to better manage its slab inventory, cutting its working capital requirement. In addition, iron ore and coking coal prices are much less volatile than slab prices. However, SSI will incur higher fixed costs associated with its steel making facilities. Nonetheless, slab production will not commence commercial production until December 2011, two months later than the original plan. The slab plant must restart after being mothballed since February 2010. The plant is also being modified and retrofitted for greater energy efficiency and higher effective capacity. In this regard, SSI plans to spend approximately US$210 million in the next six months in addition to acquisition costs of US$684 million (Bt20,487 million).
TRIS Rating said about SSI’s financial profile that it has been highly volatile over the past years, reflecting the high volatility of steel industry. In 2008, the company recorded a substantial loss due to a collapse of steel prices and lower demand resulting from the global economic crisis. SSI’s financial performance improved in 2009 due to a recovery in domestic steel consumption and the weakness of its domestic competitors. The improvement continued in 2010. However, in the first six months of 2011, SSI reported a net loss of Bt818 million. The loss was mainly from the iron and steel making business in the UK which was in the process of restarting and thus had high pre-operating costs. In addition, the earthquakes and tsunami in Japan in March 2011 caused a sharp drop in demand for HRC in the second quarter of 2011 due to the severe supply chain disruption in the auto industry. By acquiring TCP, SSI’s outstanding debts doubled from Bt18,936 million as of December 2010 to Bt37,250 million as of June 2011. The total debt to capitalization ratio increased from 48.78% in 2010 to 60.04% as of June 2011. The debt level is expected to increase further in the second half of the year as the company plans to spend approximately Bt6,300 million to improved production efficiency at TCP. However, outstanding debts are expected to gradually decrease in the medium term, because of the cash generated from slab making and the operational improvement in the rolling segment.
The Thai steel industry is somewhat protected by government policies. Local producers benefit from anti-dumping (AD) tariffs ranging from 3.45% to 128.11% on products imported from 14 countries. However, local producers are prone to be negatively affected by the influx of low-cost steel from countries not subject to AD tariffs as happened in the first half of 2011. On 11 August 2011, the Ministry of Commerce added AD tariffs on HRC imported from China and Malaysia. The government measures should relieve pressure on margins for local producers in the second half of 2011, said TRIS Rating. -- End
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