OREANDA-NEWS. November 30, 2015. Fitch Ratings says today China Oriental Group Company Limited's (COG, BB-/Stable) margins could be threatened if already weak steel prices fall further. Thinner margins could hamper the company's ability to deleverage in 2016, and put pressure on the ratings.

Leverage has been rising across China's steel sector amid continued softness in steel prices in 2015. We expect COG's gross profit per tonne to slide to around CNY40 in 2015, (2014: CNY127; 1H15: CNY59), and its leverage to reach around 6.5x at the end of 2015 (2014: 3.0x).

However, the company's business profile has not deteriorated, and it has maintained its leading position in H-section steel production. We expect the company's EBITDA margin to average around 4.7% in 2015 (2014: 6.7%), even though average steel product pricing has fallen about 40% in the year to date. We also expect the company to reduce its net debt level to CNY5.3bn by the end of 2015 (end-2014: CNY7.3bn), which demonstrates its financial flexibility as this was mostly done through working-capital management

We expect the company to further deleverage in 2016 and beyond because of stable profit generation, and lower finance costs and taxes paid, resulting in increasing free cash flow. We also assume the company will continue to manage its working capital as closely as it has in 2015. However, any further weakness in steel prices beyond our expectations could result in deterioration in margin levels that could delay deleveraging We will closely monitor COG's ability to maintain its margin levels and prudent working capital management in the next six to 12 months.