The debentures were downgraded to BBB-(tha) from BBB(tha).

Kim Eng Securities (Thailand) said in a research report, however, that SSI's future is bright due to slab orders for the second half, which are quoted at US$373 (Bt14,000) to $374 per tonne. Slab prices however climbed to $440-$490 recently.

SSI will also benefit from the baht's appreciation, which will reduce import prices. And it stands to gain as 80-90 per cent of its output is for the domestic market, the securities house said. 

Kim Eng expects SSI to swing to a net profit of Bt2.66 billion this year, from a Bt1.5-billion net loss last year.

SSI lost Bt46 million in the first quarter, compared to a Bt2.4-billion net loss in the fourth quarter and a Bt561-million net profit in the first quarter last year.

SSI is the country's first and largest producer of hot-rolled steel coils, with capacity of four million tonnes per year.

Fitch based its ratings downgrade on the substantial deterioration in SSI's financial position at end-2005. Its worse-than-expected earnings performance and higher-than-expected working capital requirements have reduced its financial flexibility.

The rating agency warned investors that the rating did not take into account SSI's possible participation in its parent's upstream iron smelting project, which could result in further pressure on its ratings.

Last year, SSI's gross earnings substantially dropped by 57 per cent to Bt2.8 billion, due largely to its slower sales volume and declining metal spread margins.

With a sharp rise in raw material stocks to accommodate its capacity expansion in the first quarter, together with its slower sales volume after the global steel price correction in the second half of last year, SSI's average inventory days jumped sharply at end-2005.

"As this was mostly funded by its short-term debt, SSI's net debt rose significantly to Bt30.4 billion at end-2005 (against Bt11.7 billion at end-2004)," Fitch said.

SSI is exposed to operational risks, including a high degree of volatility in the global steel industry. Foreign exchange risks are also a concern given SSI's substantial raw material slab imports, although this is partly hedged through some US dollar-linked revenue and the purchase of forward contracts, Fitch added.