(The following statement was released by the rating agency)
Nov 16- Fitch Ratings has affirmed Baoshan Iron & Steel Co. Ltd.'s (Baosteel) Long- and Short-Term Foreign Currency Issuer Default Ratings (IDR) at 'A-' and 'F2', respectively. The Outlook is Stable.
The Long-Term IDR is notched up a level from Baosteel's standalone rating, reflecting the strong linkages between its state-owned parent, Baosteel Group Corporation (BGC), and the Chinese government.
Fitch notes that the recent sharp fall in Chinese steel selling prices has not had a pronounced effect on Baosteel's earnings. Domestic prices for hot-rolled products have fallen 14% from their 2011 peak while prices for cold-rolled products, the largest earnings contributor to Baosteel, saw a smaller decline of 7% from the 2011 peak. However, these price falls will be offset by more rapid price declines in raw materials, such as iron ore (a 20% drop from peak) and coking coal (a 10% drop from peak). As a result, on a net basis, Fitch expects gross profit per ton (metal spread) to weaken slightly for hot-rolled sheets and rebars, and to improve for cold-rolled products.
Baosteel's reported Q311 operating profit of CNY8.1bn was 40% lower than Q310's level, due to depressed demand for auto steel stemming from weak growth in motor vehicle production thus far in 2011. Fitch believes the demand weakness is temporary, having stemmed from the termination of government incentives for auto purchase at end-2010. The agency notes that long-term demand for motor vehicles in China continues to see robust growth given low auto penetration in the market.
The Stable Outlook reflects Fitch's expectations that the over-supply condition in the Chinese steel industry will improve with the government's restructuring drive and the restrictions placed on building new steel plants.
Aggressive capex and acquisition of production facilities resulting in declining unit profit or a higher debt burden, and in turn net debt/EBITDAR exceeding 1.5X on a sustained basis at the BGC consolidated level, may lead to negative rating action. The ratings may also come under pressure if BGC's support or if state support for the company is deemed to have weakened. No positive rating action is envisaged in the next 12-18 months as the global steel industry continues to face a highly cyclical operating environment and raw material cost pressures.
Baosteel remains the most profitable listed steel company in China and its metal spreads are also the most stable among Chinese steel producers. Further, its standalone net debt/EBITDA (leverage) is lower than China's other top five state-owned steel groups - Hebei Iron & Steel Group CO. Ltd., Wuhan Iron & Steel (Group) Corporation, Anshan Iron & Steel Group Corporation, and Shandong Iron & Steel Group Co. Ltd. Fitch believes that Baosteel's parent BGC remains in net cash position and thus leverage at BGC level should be even lower.
Source:Reuters