An expectation of a weaker automotive and energy sector—two key markets for US Steel—has led Fitch to affirm a long-term issuer default rating of B-, with a negative outlook for the steelmaker.
Fitch expects US Steel’s total debt-to-EBITDA ratio to increase in the near- to medium-term because COVID-19 has upended the economy and created uncertainty in the steel industry. Moreover, US Steel’s recent decline in earnings and increase in debt also factored into Fitch’s rating, despite steps taken by the company, such as idling some of its plants, deferring capex expenses, and planning to issue around $700mn of secured notes to supplement its liquidity.
The operational decisions taken by US Steel to reduce production in tandem with weak demand could, according to Fitch, lower the steelmaker’s shipments by more than 30pc in 2020.
Declining tubular demand in the oil and gas sector and a sharp decrease in rig counts in last quarter also led US Steel to indefinitely idle its tubular operations in Lorain, Texas. According to Fitch, the steelmaker’s tubular capacity will be reduced to around 680,388mt—the total capacity of its remaining tubular plant in Fairfield. While this plant’s output could benefit from the completion of its electric arc furnace project later this year, the ratings agency indicated it expected tubular operations to report losses this year and in the near- to medium-term, unless oil prices recover.
US Steel has been exposed to the auto sector—around 20pc of its shipments were for automotive in 2019—which means the latter’s precariousness, induced by COVID-19, will affect the company, Fitch noted in its key ratings drivers for US Steel. As a result, weaker market conditions from this sector could lead to lower EBITDA for US Steel in 2020.