Companhia Siderurgica's Future Dim On Micro & Macro Woes

We issued an updated research report on one of the leading steel producers in Brazil, Companhia Siderurgica Nacional (NYSE:SID) or CSN on Jun 17, 2016. Despite solid long-term growth potential backed by exposure in steel, iron ore mining, logistics, cement and energy industries, the company faces risks from certain near-term headwinds. Below we discuss the adversities faced by the company.

Headwinds Impacting Growth Potential

Highly Leveraged: Companhia Siderurgica Nacional is a highly leveraged company with a long-term debt balance of approximately $30.6 billion at the end of first-quarter 2016. Its net debt/EBITDA ratio was 8.7x versus 8.2x in the previous quarter. If unchecked, higher debt levels might increase the company’s financial obligations and prove detrimental to its profitability.

Forex Losses: International businesses have exposed Companhia Siderurgica Nacional to risks arising from unfavorable foreign currency movements. Depreciation of the Real against the U.S. dollar can create inflationary pressures in Brazil, negatively impacting its economy as a whole.

Dicey Future Prospects: According to the World Steel Association’s report (Apr 2016), the global steel consumption will decrease by 0.8% in 2016. We expect uncertain global economic conditions to adversely impact Companhia Siderurgica Nacional’s businesses in the quarters ahead. Difficult operating conditions adversely impacted the company’s first-quarter results as well. Crude steel production declined 21% sequentially, while production of rolled steel decreased 22%.

Other Headwinds: Companhia Siderurgica Nacional is also exposed to stiff competition and high start-up costs in the industry. Also, downward pressure on steel prices by competitors may adversely affect the company’s profitability.

Conclusion

Companhia Siderurgica Nacional currently carries a Zacks Rank #4 (Sell). We believe the above-mentioned risks/headwinds clearly reflect the company’s investment value.

However, there are certain stocks in the steel industry that have been performing better than Companhia Siderurgica Nacional and have gained high investment value. They include POSCO (NYSE:PKX) , Ryerson Holding Corporation (NYSE:RYI) and Olympic Steel Inc. (NASDAQ:ZEUS) . While POSCO and Ryerson Holding sport a Zacks Rank #1 (Strong Buy), Olympic Steel carries a Zacks Rank #2 (Buy).


CIA SIDERUR-ADR (SID): Free Stock Analysis Report

POSCO-ADR (PKX): Free Stock Analysis Report

OLYMPIC STEEL (ZEUS): Free Stock Analysis Report

RYERSON HOLDING (RYI): Free Stock Analysis Report

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