Tata Steel enjoys soft coking coal prices
Tata Steel is expecting significant progress in the next six to nine months on discussions with Sweden-based SSAB AB to potentially sell its Netherlands steel business Ijmuiden, said S&P Global Ratings on 8 Dec 2020 on the steel group’s latest business performances.
Tata Steel expects US$7-$8 billion from the sale of IJmuiden which also comprises downstream production locations elsewhere in the country and produces about 6 to 7 million tonnes of high-value strip steel a year for the automotive, engineering, packaging and construction sectors.
The Dutch steel business sale could lead to material deleveraging, added the rating agency, while not assuming any growth projects over the next two years or any material proceeds from asset sales.
S&P believes Tata Steel’s adequate liquidity will continue to support the rating. Outlook on Tata Steel and its Singapore-based subsidiary ABJA Investment Co Pte Ltd is upgraded to stable from negative. At the same time, S&P affirmed ‘B+’ long-term issuer credit ratings on the two companies and the ‘B+’ long-term issue rating on the senior unsecured notes issued by ABJA.
“We expect the Tata Steel to maintain adequate liquidity over the next 12-18 months, underpinned by a strong cash position, positive operating outlook, and manageable debt maturities,” said S&P.
Tata Steel’s earnings outlook is more positive than previously anticipated as coking coal prices are expected to remain soft for the next two quarters, having already dropped by 30% on the year.
Domestic steel prices for Tata Steel’s Indian operations will be higher in the second half of fiscal 2021, with a price increase of about Rs.3,000 per ton already implemented in October 2020, said S&P Global Rating Agency.
“Weakness at the European operations has also been lower than we previously expected, thanks to the company’s earlier cost reduction initiatives as well as sizable government wage support (about £100 million received in the first half of 2020),” said the agency on 8 Dec 2020.
Tata Steel’s ratio of funds from operations (FFO) to debt will increase to about 12% in fiscal 2022, compared with the previous expectation of about 6%, according to S&P’s revised base case.
“We forecast the company’s EBITDA interest coverage will remain well above 2x–our previous downgrade trigger–in the next 12-18 months.
“Tata Steel has adequate headroom at the current rating but high leverage limits further upside. Downside rating risk has reduced significantly owing to the expected improvement in the company’s earnings,” it said in a review of the steel group’s performances.
However, Tata Steel’s leverage remains high, limiting further rating upside for now. An upgrade to ‘BB-‘ will require the company to further deleverage materially or grow its earnings well beyond our current base case.
Furthermore, operating risks remain high despite improved sentiment. Key risks include volatile steel prices due to the potential economic impact from renewed surges of COVID-19 infections and an increase in input prices, especially coking coal.
As of 30 September 2020, Tata Steel had Rs.178 billion of cash and cash equivalent. In comparison, debt maturities over the next year were only about Rs.18 billion, apart from about Rs.130 billion of short-term debt.
“We also view the company’s sound relationships with banks and its high standing in capital markets as supportive of its liquidity position,” said S&P.
The stable outlook reflects S&P’s expectation that Tata Steel’s earnings would strengthen over the next 18 months such that its key financial metrics would improve to levels appropriate for the current rating.
The stable outlook also assumes no major growth projects or asset divestments over the period.
Tata Steel is one of the largest steel producers globally with an annual crude steel capacity of close to 30 million tons, about 18 million tons in India and 10.5 million tons in Europe.
Its India operations are well integrated with captive access to iron ore although it still supplements its coal needs with imports.
The company’s business position is a mix of low-cost highly efficient steelmaking capacities in India and comparatively high-cost capacities in Europe.
Tata Steel is part of Tata Group and is about 34% owned by Tata Sons Pte Ltd. #investment #divestment #exports #imports #economy #manufacturing /fiinews.com
