Credit rating agencies noticed the steel industry’s deteriorating health. Moody’s revised ArcelorMittal’s rating down by one notch to Ba2 with a “negative” outlook.
Falling spot steel prices negatively impacted steel companies. However, steel companies face another challenge next year in terms of their contracted sales.
The focus shifted to the Chinese steel industry. China’s worse-than-expected slowdown shattered any hopes of a turnaround in the steel industry.
Rising steel imports are the biggest challenge for the US steel industry. Steel imports have been trending downwards. They registered a YoY fall for six months.
Rising Chinese steel exports and the fall in steel prices dampened US steel companies and derailed the expected 2H15 recovery.
The sentiment in the steel industry is worse. The negative sentiments in the steel industry are also dampening the service center restocking activity.
The steel industry was banking on a possible 2H15 recovery. However, the operating environment has become even more challenging.
U.S. Steel (X) and ArcelorMittal (MT) hit their fresh 52-week lows on November 12. AK Steel (AKS) and Commercial Metals (CMC) are getting close to their 52-week lows.
Although an inverted yield curve generally heralds a recession, this may not always be the case. The law of supply and demand can also be responsible for an inverted yield curve.
The addition of “at its next meeting” in the FOMC’s October statement has led market participants to believe that a rate hike may be effected in its December meeting.
Century Aluminum’s earnings have come under severe pressure because of the steep correction in aluminum prices. The company posted a gross loss in 3Q15.
Rio Tinto has the highest sensitivity to aluminum prices. It expects its earnings to rise or fall by $441 million for every 10% rise or fall in prices.
Recent data from China’s customs department regarding its aluminum exports may support weakened aluminum prices.
Aluminum was among the worst-performing base metals in October 2015. So far in November, however, aluminum prices have gained more than 4%.
A firm’s forward EV-to-EBITDA reflects what investors are willing to pay for the next four quarters. In offshore drilling, it reflects perceived riskiness.
Pacific Drilling has a debt-to-equity ratio of 113% and is more leveraged than its peer Seadrill, which has debt-to-equity ratio of 103%.
Pacific Drilling could face a covenant breach by the end of 2015. Its debts would then be subject to acceleration, meaning it has to repay them immediately.
Analysts estimate that Pacific Drilling will have a free cash flow of -$16 million in the 2H15, compared to the $106 million it had in the 1H15.
Pacific Drilling has one rig under construction, the expected delivery for which is in 4Q15. But the company is trying to postpone this newbuild delivery.
Wall Street analysts expect to see a dip in Pacific Drilling’s 3Q15 revenues. They expect costs in 3Q15 to be similar to 2Q15 but estimate a lower EBITDA.