Brazil Steel Maker CSN On Verge Of Bankruptcy As China Demand Vanishes

3 February 2016

Brazilian steelmaker CSN was downgraded to B- on Tuesday by Fitch Ratings and is now on the cusp of falling apart. One can easily blame China for the mess. Steel demand in China is in decline. The country has so much steel it doesn’t know what to do with it, except dump it on world markets. That is a problem for Brazil’s CSN. Not only is it losing sales to China, but it’s also battling against China in Europe and other markets.

CSN’s woes are indeed an entire industry’s. Brazil also has a lot of steel it doesn’t know what to do with and will be selling it at a discount as well, undercutting higher cost producers in North America, Europe and Australia. CSN is merely a Jack of Spades in a very large house of cards.

Factored into the rating downgrade is Fitch’s view that CSN’s capital structure is completely unsustainable under current market conditions.

Asset sales will prove challenging and likely to plug the cash flow gap in 2016 and 2017. With approximately 35% of its total debt in global bonds, CSN will struggle to refinance before the bill collector’s coming knocking in 2019 and 2020.

Moreover, Fitch says CSN will not come close to reaching its historic consolidated EBITDA level of BRL4.5 billion (around $1.2 billion) anytime soon.

Iron ore fundamentals are likely to deteriorate further as mills have ramped up productivity globally in response to China. With that demand falling off a cliff, the market for steel and iron ore, CSN’s core business, is in trouble.

CSN’s iron ore operations have benefited from the depreciation of the Brazilian real and the sale of higher grade ore products. But further weakening in global demand will put downward pressure on CSN’s mining operations. Based on Fitch’s mid-cycle iron ore price assumptions, CSN will generate BRL1.1 billion in iron ore EBITDA in both 2016 and 2017 compared to BRL4.2 billion in 2011 when average iron ore prices were $170 per ton. They’re at $42.6 today.