Fitch Ratings has upgraded China Steel Corporation’s (CSC) National Long-Term Rating to ‘AA(twn)’ from ‘AA-(twn)’ and affirmed the National Short-Term Rating at ‘F1+(twn)’. Fitch has also upgraded CSC’s senior unsecured rating to ‘AA(twn)’ from ‘AA-(twn)’. The Outlook on the National Long-Term Rating is Stable.

The upgrade follows Fitch’s recent upgrade of Taiwan’s Long-Term Issuer Default Rating (IDR) to ‘AA’ from ‘AA-‘ on 10 September 2021 as well as the release of the updated Taiwanese National Ratings correspondence table on 6 October 2021. In addition, Fitch expects the linkage between CSC and the Taiwanese government to remain intact.

The rating on CSC is three notches lower than the best risk in Taiwan (AA/Stable), based on a top-down approach under Fitch’s Government-Related Entities Rating Criteria in conjunction with the National Scale Ratings Criteria. The top-down approach reflects CSC’s high strategic and operational linkages with the Taiwanese government.

KEY RATING DRIVERS
Moderate Ownership, Strong Support: Fitch assesses CSC’s status, ownership and control as ‘Moderate’, as the company’s largest and controlling shareholder is the Taiwanese government via the Ministry of Economic Affairs, which holds a 20% stake. The ministry appoints CSC’s chairperson and holds three of the 11 seats on the board of directors. Fitch assesses CSC’s support record and expectations as ‘Strong’, even though the company has received little financial support from the government as it maintains strong free cash flow (FCF) generation.

We expect full government support should the need arise due to CSC’s importance to Taiwan’s steel industry, which is vital to other industrial sectors that rely on steel as a raw material. Furthermore, CSC is the only company that is legally allowed to construct and operate steel blast furnaces in Taiwan and is critical in helping the island to maintain high steel self-sufficiency.

High Incentive to Support: CSC’s position as a state-backed monopoly in upstream steelmaking allows it to capture a large share of about 70% of the domestic steel market. Therefore, Fitch assesses the financial implications for the Taiwanese government, should CSC default, as ‘Strong’. We believe CSC’s default would significantly limit funding for other state-owned companies, since CSC is a close proxy to the government. CSC has been able to tap abundant domestic and overseas funding at favourable rates as a result of its state linkages.

Steel is a key economic input for many infrastructure and manufacturing sectors and CSC has allowed Taiwan to maintain a high steel self-sufficiency rate without heavy reliance on imports. So its default would have ‘Moderate’ socio-political implications, as we believe a shortage of domestic supply would be difficult for domestic competitors or imports to fill quickly, considering CSC’s dominant market position. Moreover, a steel shortage would substantially affect Taiwan’s export-oriented economy.

DERIVATION SUMMARY
The two-notch difference between the ratings of CSC and state-owned peer, CPC Corporation, Taiwan (AAA(twn)/Stable), reflects the latter’s higher government ownership and more significant policy role. We also deem CPC’s core business of oil and natural gas as more strategic than steelmaking. In addition, CPC is Taiwan’s largest distributor of key refined-oil products and is responsible for importing crude oil and gas to satisfy domestic energy demand.

RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:

– Strengthened probability of government support.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Lower probability of government support.

ISSUER PROFILE
CSC is the largest integrated steel producer and the only steel producer with its own blast furnace in Taiwan with consolidated annual crude steel capacity of around 16 million tonnes, which accounts for over 70% of the domestic steel market.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
CSC’s ratings are linked to Taiwan’s IDRs, based on a top-down approach under Fitch’s Government-Related Entities Rating Criteria.

PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
Source: Fitch Ratings