A sharp rise in coking coal prices globally can bring the profitability of Tata Steel (TSL) under pressure, Fitch Ratings said today.
“TSL’s profitability could also come under pressure from the sharp increase in international coking coal prices since August 2016,” it said in a statement.
There is also uncertainty over the period of regulatory protection from imports will be sustained. Government lowered the number of products under minimum import price (MIP) from 173 to 66 in August 2016 and extended the duration until October 4, 2016, it added.
Besides, it imposed anti-dumping duties on the remaining products, however, the duration is six months, Fitch said.
Though, Tata Steel announced completion of sale of its unprofitable Long Products Europe business, there is uncertainty around its plans to restructure the remaining key assets in Port Talbot, UK and IJmuiden, Netherlands as well as issues, like UK pension liabilities remaining unresolved, it said.
TSL is in discussions with strategic players, including ThyssenKrupp AG, to explore the feasibility of a joint venture for its remaining European business.
“We assume the status quo remains, and hence, a further restructuring of assets presents a risk to our estimates,” Fitch said.
On Tata Steel’s India operations, the ratings agency said its profitability has declined by around 35 per cent y-o-y to Rs 7,560 per tonne in 2015-16 fiscal due to weak steel prices and competition from imports.
TSL’s Q1 2016-17 EBITDA/tonne remains significantly less than the 2014-15 average, although profitability has improved following an upswing in realisations after government imposed protectionist MIP in February 2016, it said.
Domestic demand growth has been anaemic so far in 2016-17, with consumption over April to August 2016 increasing at just 1.3 per cent (2015-16: 5.9 per cent).
Meanwhile, producers, including TSL, are looking to increase sales volume following recent capacity expansion.
TSL started commercial operations for the first phase of its greenfield plant at Kalinganagar in Odisha with a capacity of 3 million tonnes per annum (MTPA).
TSL expects to ramp up output gradually and is targeting volume of 1 MTPA in 2016-17. Apart from higher sales, the new plant will improve TSL’s product-mix, as it specialises in producing high-grade flat products, the ratings agency said.
Fitch Ratings has maintained the Rating Watch Evolving on the ‘BB’ Long-Term Issuer Default Rating of TSL and ‘B’ Long-Term IDR of Tata Steel UK Holdings Limited.
The steel producers’ ratings were placed on Rating Watch Evolving on April 1, 2016 after it announced on March 29, 2016 that it is exploring options for portfolio restructuring in Europe, including potential divestment of its UK operations.
“TSL managed to sell a key loss-making asset in May 2016, but the final structure of the group and its debt remains unclear and will affect TSL’s rating,” it added.