Bangkok--13 Dec--TRIS Rating TRIS Rating Co., Ltd. has affirmed the company rating of Sahaviriya Steel Industries PLC (SSI) and the rating of SSI’s existing debentures at “BBB” with “negative” outlook. The ratings reflect SSI’s market position in Thailand as a leading producer of flat steel products, strong relationships with customers of premium grade products, a market protected by quotas and tariffs, and a variable cost structure that enhances production flexibility. These strengths are tempered by high competition from both local and overseas manufacturers, the cyclical nature of the steel industry, short-term customer contracts (one to three months), and limited operating diversity. TRIS Rating maintained the “negative” outlook for SSI based on the expectation that SSI’s financial profile will be under pressure during the next 1-2 years. Though the company’s financial performance was weaker than anticipated, its financial profile still warrants the “BBB” ratings. However, the ratings would be downgraded if there is a material deterioration in the company’s financial profile, which might be caused by lower cash flow generation as a result of declining market prices or lost volume. A substantial rise in strategic investments, leading to weaker cash flow protection, will also exert downward rating pressure. TRIS Rating reported that SSI is the market leader among the three hot rolled coils (HRC) manufacturers in Thailand in terms of production and sales volume. Unlike integrated steel mills and mini-mills, SSI does not manufacture steel, the company processes semi-finished steel slabs into flat-rolled coils. SSI owns a single production facility located close to a deep-sea port in Prachuap Khirikhan province. The sea port location was strategically chosen to cut transportation costs for both raw materials and finished steel products. Its domestic clients accounted for 78% of total shipments in the first nine months of 2007. The Thai steel industry is somewhat protected by government policies. Local producers benefit from anti-dumping tariffs ranging from 3.22% to 128.11% on products imported from 14 countries. However, local producers are prone to be negatively affected by the influx of low cost steel from countries not subject to anti-dumping tariffs, particularly China.TRIS Rating said, SSI’s operational risk stems from its concentration of operation in a single production facility, which means that any unplanned shutdowns could impact cash flow stability. In addition, the lack of vertical integration and product diversity exposes the company to the volatility of supply and demand for slabs and HRCs in the world market. SSI’s business model to stock a broad range of slabs to meet customers’ needs exposed it to inventory holding risk and a high working capital requirement. SSI’s operating performance in the first nine months of 2007 was weaker than expected. Shipments for the first nine months of 2007 were 0.96 million tonnes, down by 31% from the same period last year. The decline was mainly due to sluggish demand in the domestic market and high slab and transportation costs. SSI slashed production to 0.88 million tonnes, compared with 1.25 million tonnes in the same period last year. A cost structure with high variable costs benefits SSI in terms of production flexibility. The company can adjust production schedule to match the market environment. Operating margin before depreciation and amortization in the first nine months of 2007 was 7.10%, improved from 6.31% in the same period of 2006. As business slowed, SSI’s outstanding debt declined as its loan was used mainly to finance working capital. Outstanding debt declined from Bt30,670 million as of December 2005 to Bt21,960 million as of December 2006 and further to Bt15,659 million as of September 2007. The total debt to capitalization ratio and the funds from operations to total debt ratio improved from 52.30% and 4.88% in 2006 to 43.55% and 6.67% (non-annualized) in the first nine months of 2007, respectively.