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Rated Chinese metals & mining issuers’ top-line generation will return to pre-coronavirus performance in 2H20 on the back of higher commodity prices, says Fitch Ratings. Steel producers have recovered much faster than aluminium since 2Q20, as steel demand is dominated largely by construction activities which have returned to a normal pace since April. Aluminium’s significant downstream exposure to auto and appliances showed slower signs of recovery up until June, resulting in a weak operating performance.
Despite strong revenue generation for the remainder of the year, we do not expect general capex reduction from rated issuers, as such capex is driven largely by policy requirements for environmental upgrades. As a result, we expect overall free cash flow (FCF) to remain negative. Both revenue and EBITDA generation should be in line with our pre-pandemic forecasts in 2021 and beyond. FCF generation will return, and overall leverage will decrease.
Our rated issuers are dominated by stated-owned enterprises (SOEs) whose ratings are linked to their respective state owners, and are largely investment-grade. However, we do expect these companies’ standalone credit profiles (SCPs) to diverge due to the downturn. For example, we expect China Baowu Steel Group Corporation Limited (A/Stable) to maintain its ‘bbb’ SCP from strong revenue and cash flow following acquisition of Magang in 2019 and Taiyuan Iron & Steel (Group) Co Ltd in 2020, which boosted its annual crude steel capacity by about 50%. Other GREs such as Aluminium Corporation of China (A-/Stable), China Minmetals Corporation (BBB+/Stable), HBIS Group Co., Ltd. (BBB+/Stable) and Jiuquan Iron & Steel (JISCO) (BBB-/Stable) have weaker SCPs at ‘b-‘ to ‘b’ due to high leverage. Their leverage should rise further due to inflexibility in capex and weaker 1H cash flow.