OREANDA-NEWS. Fitch Ratings says that the continued price weakness in the Indonesian steel pipe market is unlikely to have any material impact on the larger domestic manufacturers like PT Steel Pipe Industry of Indonesia Tbk (Spindo, A-(idn)/Stable). The credit profile of Spindo, which has the largest pipe production capacity in Indonesia, will continue to benefit from a relatively stable EBITDA margin and adequate volume growth.

Data from the Indonesian Iron & Steel Industry Association (IISIA) show that national steel pipe production capacity reached 2.74 million tonnes in 2015. However, the association forecasts demand to remain at 2.57 million tonnes until 2020. Fitch believes that the excess capacity alone will not put meaningful pressure on domestic steel pipe prices because the gap between demand and production is not large. However, price pressure is likely to come from a combination of a prolonged decline in steel prices and low-cost imports from China, where steel production cannot be fully absorbed domestically. Demand for the Indonesian steel sector will depend heavily on the pace of work on large government-led infrastructure projects across Indonesia.

Fitch estimates that Spindo will be able maintain a stable EBITDA margin despite weak selling prices because they are likely to be counterbalanced by cheaper raw material inputs due to the excess global steel supply. Spindo's EBITDA margin remained stable in 2015 at about 14% compared with 13.8% in 2014, even though its average selling price fell by around 10%.

Spindo's credit profile will also be supported by higher production from its capacity expansion programme. Fitch estimates that a combination of higher output and stable EBITDA margin will help the company keeps its net debt/EBITDA below 4.5x - the threshold at which negative rating action might be taken. Sales are likely to grow by 15%-20% in 2016 (2015: 6.4%) on the back of economic recovery and capacity additions. Spindo's sales volume rose by a robust 22% in January 2016 from a year earlier.

Fitch expects some measures from the government to limit the price pressure in the Indonesian steel pipe industry, which is likely to persist in the medium term. For instance, the Ministry of Industry's rule Number 11/2016 requires certain types of steel pipes to meet the Indonesian National Standard, which will limit the use of non-compliant Chinese steel products.