Ukraine steel, iron producers downrated by S&P Global Ratings

S&P Global Ratings said March 3 it has taken negative rating actions on Ukrainian steelmakers Interpipe Holdings and Metinvest and Ukraine-based iron ore pellet producer Ferrexpo because of the operational and financial consequences of Russia's military intervention in the country.

Long-term credit ratings on Interpipe and Metinvest have been lowered to 'B-', from 'B' and 'B+' respectively, with the companies placed on CreditWatch with negative implications. Ferrexpo's 'B-' long-term and 'B' short-term issuer credit ratings have been placed on CreditWatch with negative implications.

The CreditWatch placing indicates the companies' ratings could be lowered further in the next 90 days if the duration and intensity of the conflict jeopardizes the sustainability of their operations, with the risk of a rapid and material weakening of cash flow and liquidity, the ratings agency said in a press statement.

"We anticipate severe business disruptions for the three Ukraine-based commodities players," S&P Global Ratings said. "We envisage a range of possible issues regarding production, logistics, use of infrastructure for exports, as well as the health and safety of employees, and we cannot rule out the risk of damage to their production facilities. This may have severe consequences for the companies' business and financial profiles."

On Feb. 25, the ratings agency lowered its long-term foreign and local currency sovereign ratings on Ukraine to 'B-', placing the nation on CreditWatch with negative implications, on the ground that Russia's military intervention poses risks to Ukraine's economic growth, financial stability, external position, and public finances.

Port access interrupted

S&P Global Ratings noted that access to and use of Ukraine's main ports on the Black Sea and the Sea of Azov--notably Mariupol and ports in the Odessa region--may be interrupted for a prolonged period, which is likely to significantly impact the three rated companies, which are largely exporters. In addition, "the conflict could cause problems such as a lack of personnel, because of acute safety risks, or a lack of sufficient energy supply or raw materials; and a heightened risk of cyberattacks, aiming to inflict damage on IT operations," the ratings agency said.

The three issuers have good cash balances, supported by a policy to maintain a material proportion of the cash abroad, and very limited debt maturities in the next 12 months, said S&P Global Ratings, while recognizing that liquidity may come under pressure if the companies are unable to generate sufficient cash flow from their operations.

Company product, export data

Interpipe is a vertically-integrated, low-cost manufacturer of steel pipes and railway wheels. In 2021 its pipes were sold to Ukraine (24%); Middle East and North Africa (22%); Americas (21%); Europe (19%); Commonwealth of Independent States (11%); and others (2%), the ratings agency reported.

Ferrexpo is the third-largest exporter of iron ore pellets in the world. In 2020, it shipped 11.9 million mt, equivalent to about 9% of the global market, after Vale (32.7 mt or 24%), and LKAB (16.3 mt or 12%).

Ferrexpo exports all its production, with no exposure to Russia, the ratings agency said. China and Southeast Asia are the company's biggest markets, accounting for 58% of export revenue, while Central and Western Europe accounted for 30%. The remaining 12% was split between Northeast Asia, Turkey, the Middle East, India, North America, and others. Exports are moved via rail or through the port of Pivdennyi. Both routes are currently almost fully suspended, leading the company to stockpile iron ore pellets at its mining and processing site in central Ukraine, near Horishni Plavni.

Netherlands-registered Metinvest is a vertically-integrated steel producer with three iron ore pits in Ukraine and one joint venture (Southern GOK). Iron ore concentrate production was about 31 mt in 2020, with some 63% sold to third parties. It also owns a coking coal producers in the US (United Coal) and in Ukraine (Pokrovske Coal), with annual production capacity of 3 mt each. It operates three integrated steel mills in Ukraine with a combined crude steel capacity of about 12.8 mt. It also has a joint venture (Zaporizhstal) with a further capacity of 4 mt. About 25% of the production is consumed domestically. In addition to one re-rolling facility in Ukraine, the company has two re-rolling facilities in Italy, one in the UK, and one in Bulgaria, with a total capacity of about 2 mt, as well as four domestic coke facilities.

Typically the company exports 72% of its output, with 6% going to CIS countries, according to S&P Global Ratings.

In 2020, Europe accounted for 27% of sales, MENA 17%, Southeast Asia 14%, and North America and others 7%. Metinvest uses Mariupol port in the Sea of Azov for steel exports. Roughly 30% of steel exports, mainly to neighboring counties, are routed via rail. Around 30% of its iron ore is also shipped via rail, while seaborne shipments are mainly through the Yuzhny port, the ratings agency reported.

Metinvest has informed it has suspended operations at its Ilyich Steel and Azovstal steel plants, both of which are located inside the city of Mariupol, as a result of the current crisis.