Metinvest has received a Fitch Ratings outlook downgrade from stable to negative in June 2020.
The rating demotion was driven by a weak global steel industry, along with the company’s low financial flexibility, limited cash flow, and risk of acting as a working capital provider for subsidiaries.
Steel consumption is expected to decline substantially in 2020 resulting in an oversupplied steel market and strong pricing competition both in domestic and export markets. In 2020, worldsteel forecasts that steel demand will fall 6.4pc compared to 2019 primarily due to COVID-19.
Metinvest’s weak earnings in 2019, which decreased 50pc compared to 2018, limited its financial flexibility into 2020, according to Fitch. The company further weakened its financial position after extending $367mn in credit to associate companies in late 2019 and early 2020, which increased its debt level by $250mn to $3.3bn.
Fitch expects Metinvest’s earnings to be primarily impacted by price rather than volume risk. The rating agency expects Metinvest’s production to increase later in the year, which may result in volume levels close to 2019. However, domestic and export prices could tighten the company’s margins at close to cost until Q3 2020 as consumption begins to gain momentum.
Metinvest is also considered less competitive than other Russian steel companies such as NLMK and PJSC Manitorogorsk Iron and Steel Works, according to Fitch. Usually, re-rolling facilities in Europe would support the higher cost structure, but Fitch views that as a risk because weak demand for steel in Europe might persist through the year. Metinvest also faces higher electrictity costs compared to other CIS firms. Moreover, the higher costs may result in subsidiaries requesting additional bridge loans until demand begins to improve.
Metinvest implemented strong budget management measures to target efficiency improvements and decrease costs. The strategies include a 30pc reduction in administrative staff, renegotiation of contracts with suppliers, suspending dividend distributions in the short-term, and reducing the capital guidance over the next two years. Projects with continued capital expenditures are expected to cut costs in the long-term.
Metinvest has committed to improve higher utilization rates and optimize sales portfolios in the CIS or Europe through the year which may result in Fitch Ratings upgrading it back to stable in the medium-term.
In 2019, Metinvest produced 8.8mn mt of steel products and 29mn mt of iron ore. The company is fully self-sufficient in iron ore supplies but is increasing production of coking coal to improve the close to 50pc self-sufficiency level.