ArcelorMittal (Ba1 negative) said on 17 July that it is dropping its plan to build a steel plant in eastern India with an annual production capacity of 12 million tonnes, according to news reports. The announcement came two days after news reports that POSCO (Baa1 negative) is cancelling its plan to build a $5.3 billion steel plant in India capable of producing 6 million tonnes per annum. Both companies attributed the cancellations to deteriorating market conditions in the steel industry, along with project-specific issues such as delays in land acquisitions and uncertainties over iron-ore supply.
Slowing economic growth in China, which is Asia’s largest consumer and producer of steel, has reduced demand for steel over the past two to three years. Excess supply has pushed steel prices and steel producers’ profits to historical lows. Steelmakers’ net profit margins have also contracted and their debt leverage has increased as a result of weak cash flow generation. They are now more cautious about capital expenditures and need to ensure they have an adequate cash cushion.
We downgraded the ratings or changed the outlook to negative for three of the seven Asian steel companies we rate over the past 12 months1, including POSCO, because their credit metrics have weakened alongside demand.
The project cancellations also indicate that the long-term sales and earnings prospects for new steel plants have become less favorable than in the past. Both ArcelorMittal and POSCO began study on their new plants when steel demand was increasing by more than 10% per annum in Asia. The benefits of building an efficient steel have diminished because utilization rates will likely be low given the weak demand, and companies’ interest burdens will increase if they use debt to fund the projects.
We expect the operating environment will remain challenging for steel companies over the next 12 months given slowing GDP growth in China - it declined to 7.5% in the second quarter; the decrease in China’s Purchasing Managers’ Index (PMI) to 50.1 in June, which reflects limited expansion in the country’s manufacturing sector; and continued overcapacity.
The plant cancellations will have limited impact on the credit quality of our rated Asian companies including POSCO. For POSCO, we have not assumed the $5.3 billion capital expenditure for its Indian project in our rating given its delay in land acquisitions. Nevertheless, the exit will allow POSCO to focus more on its cost savings.
Slowing economic growth in China, which is Asia’s largest consumer and producer of steel, has reduced demand for steel over the past two to three years. Excess supply has pushed steel prices and steel producers’ profits to historical lows. Steelmakers’ net profit margins have also contracted and their debt leverage has increased as a result of weak cash flow generation. They are now more cautious about capital expenditures and need to ensure they have an adequate cash cushion.
We downgraded the ratings or changed the outlook to negative for three of the seven Asian steel companies we rate over the past 12 months1, including POSCO, because their credit metrics have weakened alongside demand.
The project cancellations also indicate that the long-term sales and earnings prospects for new steel plants have become less favorable than in the past. Both ArcelorMittal and POSCO began study on their new plants when steel demand was increasing by more than 10% per annum in Asia. The benefits of building an efficient steel have diminished because utilization rates will likely be low given the weak demand, and companies’ interest burdens will increase if they use debt to fund the projects.
We expect the operating environment will remain challenging for steel companies over the next 12 months given slowing GDP growth in China - it declined to 7.5% in the second quarter; the decrease in China’s Purchasing Managers’ Index (PMI) to 50.1 in June, which reflects limited expansion in the country’s manufacturing sector; and continued overcapacity.
The plant cancellations will have limited impact on the credit quality of our rated Asian companies including POSCO. For POSCO, we have not assumed the $5.3 billion capital expenditure for its Indian project in our rating given its delay in land acquisitions. Nevertheless, the exit will allow POSCO to focus more on its cost savings.
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