Jiming Zou, Vice President Senior Analyst. Asian Steel Producers Supply Glut and Low Prices Will Reduce Earnings and Keep Leverage High in 2016

Transcription

1 Jiming Zou, Vice President Senior Analyst Asian Steel Producers Supply Glut and Low Prices Will Reduce Earnings and Keep Leverage High in 2016

2 Agenda 1. Declining Chinese steel demand exacerbates supply glut and price declines 2. Asian steel companies earnings will weaken in Debt leverage will remain high in 2016 after increasing significantly last year 4. Market consolidation will accelerate and favor large companies 2

3 1 Declining Chinese steel demand exacerbates supply glut and price declines 3

4 Chinese steel demand will continue to decline in 2016» We expect Chinese steel demand will fall another 5% in 2016 given the slow investments in real estate and infrastructure development as well as weakening domestic manufacturing activity. Real estate sector: a 14% decline in newly started construction areas in 2015 Infrastructure projects: positive growth but won t be sufficient to lift overall demand Manufacturing activities: weakening given China s PMI below 50 (49.4 in January) Chinese Steel Demand and Production Will Decline in 2016 Sources: China Iron & Steel Association, China's General Administration of Customs, Moody s Investors Service projection 4

5 Chinese steel exports exacerbate regional supply glut» Anti-dumping investigations and safeguard duties will limit Chinese net steel exports growth to a single-digit percentage in 2016 from about 25.5% in 2015.» The slowdown in export growth is from a high base. China s export volume of 112 million tonnes in 2015 was larger than the steel manufactured in Japan.» About two thirds of the Chinese exports were shipped to Asian countries. China s Steel Exports Will Continue Increasing as Imports Decline 5

6 Significant pricing pressure in the Asian steel industry» The large amount of Chinese steel exports results in significant pricing pressure in Asia.» Chinese export hot rolled coil price of $267 per tonne was much lower than India s domestic price of $400 per tonne at the end of Significant Pricing Pressure Is Spreading from China to Other Asian Countries 6

7 Rated Asian steel companies registered price declines» Price declines, coupled with reduced production, led to lower revenues in Baseline credit assessment/ Fundamental credit profile Outlook Change in 2015 vs Average selling price in local currency Revenue in local currency *** Production Moody's rated Asian steel companies Final rating volume POSCO Baa2 Baa2 Negative -16.6% 0.8% -10.6% NSSM (estimated for fiscal year ending March 2016) A3 A3* Review for Downgrade -11.7% -5.3% -11.4% JFE (estimated for fiscal year ending March 2016) (P)Baa1 Baa1* Negative -13.1% -3.4% -11.2% Baoshan Iron & Steel (estimated by Moody's) A3 Baa2 Review for Downgrade -18.6% 5.1% -12.6% Baosteel Group (estimated by Moody's) A3 baa3 Review for Downgrade -20.0% -16.0% -20.0% Hyundai Steel Baa3 Ba2 Positive -6.1% 3.1% -3.8% JSW (estimated by Moody's for Apr-Dec 2015) Ba3 Ba3 Negative -21.2% -2.2% -22.3% Tata Steel (estimated by Moody's for Apr-Dec 2015) Ba3 B1 Negative -16.0% -1.4% -17.2% China Oriental (estimated by Moody's) B2 B2 Negative -31.0% 2.6% -30.0% China's large and medium steel companies ** -31.5% -2.1% -19.5% Sources: Company financial reports, China Iron & Steel Association, Moody Investors Service estimates and projections 7

8 2 Asian steel companies earnings will weaken in

9 Asian steel production volumes will decrease in 2016» Steel production volumes will decrease primarily because of the decline in Chinese demand. China accounts for three quarters of Asian steel production.» India s demand growth won t be sufficient to prevent an overall demand decline in the region, as India accounts for only about 8% of Asian steel production. Steel Production Volume in Asia Will Trend Lower in

10 Persistent oversupply will prevent price recovery» It will take time for producers to reduce capacity in response to the declining demand.» New steel capacities (see below) coming on-line in 2016 will dilute the efforts of capacity elimination. Baosteel s 9 mtpa Zhanjiang project, Wuhan Iron & Steel Company s 9 mtpa Fangchenggang project, Tata Steel s 3 mtpa greenfield Kalinganagar plant, JSW Steel s 4 mtpa brownfield expansion, Formosa s 7 mtpa Ha Tinh project in Vietnam.» The modest price increase in January 2016 was triggered by a temporary reduction in supply after many steel mills started maintenance and idled production, rather than a fundamental improvement in the supply-demand balance. 10

11 Asian steel companies have weak bargaining power» Asian steel companies are not able to reduce their input costs faster than the fall in steel prices due to the fragmented nature of the region s steel industry, where many producers bid for seaborne iron ore from a handful of Australian and Brazilian suppliers.» Asian steel companies bargaining power against customers is also weak given the massive oversupply. Steel Prices Have Declined Faster Than Iron Ore Prices Since March

12 Production spread will remain at historical lows» Chinese production spread will remain at historical lows given the limited improvement in demand supply balance and inability to reduce input costs faster than the fall in steel prices.» Steel mills focus on cash flows to pay for employees and interest on bank loans, coupled with asset disposals and government subsidies, keep the mills running despite the deep losses. Production Spread in China Will Remain at Historical Lows 12

13 Market downturn depressed EBITDA per tonne» Chinese steel producers will underperform regional peers given the massive oversupply in China.» Leading Korean and Japanese steel companies (POSCO, NSSM, JFE) are more resilient thanks to their focus on quality premium products.» The ramp-up of new steel-production capacity, resumed captive iron ore production and the government s introduction of minimum import prices will help Tata Steel and JSW Steel mitigate earnings pressure in steel production (million tonne) 2015 EBITDA (USD million) 2015 EBITDA per tonne (USD) 2014 steel production (million tonne) 2014 EBITDA (USD million) 2014 EBITDA per tonne (USD) Year-onyear change in EBITDA per tonne Moody's rated Asian steel companies POSCO , , % NSSM , , % JFE , , % Baoshan Iron & Steel , , % Hyundai Steel , , % JSW Steel , % Tata Steel , , % China Oriental % 13

14 3 Debt leverage will remain high in 2016 after increasing significantly last year 14

15 Debt leverage will remain high in 2016» We expect the rated steel companies' adjusted debt/ebitda to average 5.1x in 2016, up from 4.1x in 2014 and down from 5.7x in 2015 given corporate austerity efforts.» Interest coverage followed a similar deteriorating trend in 2015, and will improve slightly to 7.9x in 2016 but remain lower than the 2014 level of 9.6x.» Unrated steel companies are typically weaker in debt service ratios than those rated ones. EBITDA/Interest Debt/EBITDA Moody's rated Asian steel companies e e POSCO NSSM JFE Baoshan Iron & Steel Baosteel Group Hyundai Steel JSW Steel Tata Steel China Oriental Average

16 Moody s took negative rating actions on most steel companies in recent weeks Asian Steel Companies Current Rating and Outlook Rating Actions POSCO Baa2 negative Outlook changed to negative from stable on 2 Feb NSSM A3 review for downgrade Rating placed under review for downgrade on 3 Feb JFE (P)Baa1 negative Outlook changed to negative from stable on 4 Feb Baoshan Iron & Steel A3 review for downgrade Rating placed under review for downgrade on 19 Feb Baosteel Group A3 review for downgrade Rating placed under review for downgrade on 19 Feb Hyundai Steel Baa3 positive No action JSW Steel Ba3 negative Rating downgraded to Ba3 from Ba1 on 3 Feb Tata Steel Ba3 negative Rating downgraded to Ba3 from Ba1 on 11 Feb China Oriental B2 negative No action 16

17 4 Market consolidation will accelerate and favor large companies 17

18 Consolidation will accelerate and favor large companies» Most rated Asian steel companies are leaders in their respective markets, and have healthier balance sheets and stronger cash flow than the industry average.» Small inefficient producers will become unviable because of their limited resources to cover business losses and cash-flow shortfalls, and to refinance their maturing debt.» The Chinese government is seeking to consolidate the domestic steel industry by rejecting applications for new steel capacity, enforcing stricter environmental regulations against polluting mills and aligning the performance evaluations of local government officials with targets for closing inefficient and polluting mills.» However, significant uncertainty about the pace of the capacity reduction and rebalancing of demand and supply in China, given the need to address unemployment and lost tax revenue resulting from facility closures, and the bad loans on the unviable producers books. 18

19 Moody s analysts covering Asian steel companies: Jiming Zou VP-Senior Analyst Corporate Finance Group jiming.zou@moodys.com Wan Hee Yoo VP-Senior Analyst Corporate Finance Group wanhee.yoo@moodys.com Kaustubh Chaubal VP-Senior Analyst Corporate Finance Group kaustubh.chaubal@moodys.com Takashi Akimoto Analyst Corporate Finance Group takashi.akimoto@moodys.com Chris Park Associate Managing Director Corporate Finance Group chris.park@moodys.com 19

20

21 This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATING AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody s Publications. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY S. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Moody s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody s Corporation ( MCO ), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody s Investors Service, Inc., have, prior to assignment of any rating, agreed to pay to Moody s Investors Service, Inc., for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading Investor Relations Corporate Governance Director and Shareholder Affiliation Policy. For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY S affiliate, Moody s Investors Service Pty Limited ABN AFSL and/or Moody s Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY S that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act MOODY S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to make any investment decision based on MOODY S credit rating. If in doubt you should contact your financial or other professional adviser. For Japan only: Moody's Japan K.K. ( MJKK ) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody s SF Japan K.K. ( MSFJ ) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ( NRSRO ). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non- NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. 21