Fitch Ratings has affirmed China Steel Corporation’s (CSC) National Long-Term Rating at ‘AA(twn)’ with a Stable Outlook and National Short-Term Rating at ‘F1+(twn)’. Fitch has also affirmed CSC’s senior unsecured rating at ‘AA(twn)’.

CSC’s National Long-Term Rating reflects its high strategic and operational linkages with the Taiwanese government (AA/Stable) and low default risk relative to domestic issuers.

KEY RATING DRIVERS

State Ownership, Incentive to Support: The Taiwanese government, via the Ministry of Economic Affairs, holds a 20% stake in CSC and is the largest and controlling shareholder. The ministry appoints CSC’s chairperson and holds three of the 11 seats on the board of directors. The government has extended significant policy support to CSC so that it is the only company that is legally allowed to construct and operate steel blast furnaces in Taiwan and has a dominant market share of 70%.

We expect full government support for CSC, if needed, because of the company’s importance to Taiwan’s steel industry despite receiving little financial support recently. The steel industry affects other industrial sectors that rely on steel as a raw material, especially given Taiwan’s export-oriented economy. We also believe CSC’s default would significantly limit funding for other state-owned companies.

Dominant Low-Cost Producer: CSC’s EBITDA margin is consistently higher than those of regional peers due to its low-cost position, downstream vertical integration with a focus on high value-added products. CSC is Taiwan’s largest steel producer and the only one that is vertically integrated, giving the company a significant cost advantage over other steelmakers in Taiwan. CSC’s steel plants were placed in the second quartile of CRU’s cost curve for flat and long steel products in 2022.

Negative FCF, Increasing Leverage: CSC has a good record of free cash flow (FCF) generation, but we expect FCF to turn negative in 2022 on lower EBITDA generation due to low steel prices, and a large dividend payment associated wit

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