Global agency Moody’s on Friday downgraded the outlook on Tata Steel from stable to negative on account of persistent weakness in the global commodity prices and resulting negative impact on the steelmaker.
“Moody’s Investors Service has affirmed Tata Steel’s Ba1 corporate family rating (CFR) and changed the rating outlook to negative from stable,” it said in a statement.
The agency affirmed Tata Steel UK Holdings’ (TSUKH) CFR and probability of default rating at B2/B2-PD, and changed the ratings outlook to stable from positive, it added.
The rating actions reflect the persistent weakness in global steel prices led by China’s economic slowdown and the resulting negative impact on the credit profiles of Tata Steel and TSUKH, Moody’s said.
“Our rating actions are premised on a near-term increase in global demand for steel being unlikely, and as such, a material recovery in steel prices remains a low probability,” Moody’s vice president and senior analyst Kaustubh Chaubal said.
India’s steel imports were up 42% by volume in H1 of 2015-16 from the same period last year. As a result, Indian hot rolled coil prices (HRC) fell 37%, leading to Tata Steel India’s (TSI) realisations/tonne falling about 18% to Rs 40,853 a tonne.
Steel prices in Europe have also fallen sharply, due to persistent overcapacity in Europe, and high levels of cheaper imports, particularly from China, it said.
Tata Steel’s European operations reported a 77% drop in its EBITDA/tonne at Rs 649 for H1 2015-16, predominantly because of an EBITDA loss in Q2 FY16, it added.
“Moody’s rating actions result from the weakening in Tata Steel’s and TSUKH’s operating performance and debt protection metrics, and our expectation that a continued contraction in earnings will be evidenced.
“This is given the challenging conditions facing global steel industry, and in particular, Tata Steel’s key markets of India and Europe,” Chaubal, who is also the Lead Analyst for Tata Steel and TSUKH, said.
While TSI’s backward integrated operations continue to help in sourcing 100 per cent of its iron ore and 40 per cent of its coking coal requirements, the benefit is somewhat diminished, Moody’s said.
This is due to low raw material prices and increasing cost of mining in India, due to contributions to the District Mineral Foundation that have increased mining costs, it added.