Despite an expected decline in 2009 iron and steel prices and declining worldwide steel production, the 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, the leading global ratings agency Fitch Ratings stated in its special report entitled, "Emerging Market Iron & Steel - Surviving the Downturn".
"The sharp weakness in the global economic environment from Q3 2008 saw iron and steel producers rapidly losing pricing power with destocking 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," Fitch's Asia-Pacific Corporate team director Su Aik Lim stated. "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-'/Rating Watch Negative (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.
The EBITDA margins of Brazilian and CIS iron and steel producers that are self-sufficient in iron ore are expected to decline more that those of steel producers that purchase ore from third parties.
In addition, Fitch stated that 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.
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.
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, as they are more exposed to low value-added products (such as slabs, billets and pig iron), and are more export-oriented as the domestic consumption of steel is very limited.
"In May 2009, Fitch placed Evraz on Rating Watch Negative, reflecting the agency's concerns that the company's financial leverage may deteriorate," said Sergey Guishunin, Director in Fitch's Russian/CIS Corporate team.
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 markets, 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.