Fitch Ratings expects to see demand for steel to recover from low levels at a modest pace over the next 12-18 months but not to reach peak levels in the medium term, according to its 'Worldwide Steel Outlook', issued today. Pricing should be constrained by excess capacity but raw material cost increases are expected to be passed through. Excess or below-cost production should be limited. Regional differences in steel market dynamics have re-emerged and will be a major influence on steel producers' profitability and cash flow generation in 2010.
"Steel producer earnings were severely affected over the last year but most companies rated by Fitch improved their liquidity through cost reductions, working capital management, dividend reductions and credit facility amendments"
"Steel producer earnings were severely affected over the last year but most companies rated by Fitch improved their liquidity through cost reductions, working capital management, dividend reductions and credit facility amendments," said Monica Bonar, Director at Fitch. "These measures should serve well over this period of slow recovery, and financial leverage should decline over the year. Ratings remain under pressure given the severity of the downturn and limited visibility on the recovery."
Fitch says worldwide steel trade has fallen more than production as a result of sharply lower demand in importing nations coupled with low capacity utilization and short lead times at domestic steel mills. Producers relying on exports will be exposed to price competition approaching marginal cost, intensifying trade barriers, and currency fluctuations.
KEY 2010 THEMES/EVENTS:
--China is dominant, accounting for 38% of global steel production and 37% of global steel consumption in 2008. While demand continues to grow, capacity increases have been outsized. This, coupled with high stocks at traders results in a substantial overhang to the domestic market and limits price appreciation. Excess production would pressure weak domestic markets in Europe and North America or exports from Russia and Brazil.
--The rebound in production from China is driving up prices for raw materials albeit from reduced levels. Fitch expects raw materials prices to be up 15%-20% in 2010 over 2009. Companies with self-sufficiency have likely trimmed the cost of downstream operations since the end of 2008 and should benefit especially when mill capacity utilization exceeds 75%.
--Fitch expects more Chinese steel producers to invest in low-cost raw material supply. Outside of consolidating and integrating activity for Chinese producers, Fitch expects merger and acquisition activity in the sector to be modest.
--Results for the fourth quarter should show seasonal weakness but Fitch expects results in the first half of 2010 to be more indicative of the strength and sustainability of the recovery.
--Stocking activity in most markets has been extremely restrained and this is likely to persist until the recovery is well underway and lead times stretch. |
