News Room - Steel Industry

Posted on 30 Jun 2010

Global Steel in Recovery; Challenges Remain

Fitch Ratings expects to see demand for steel to continue on a slow and steady recovery pace over the next 12-18 months but not to reach peak levels for developed nations until 2012, according to its 'Worldwide Steel Outlook', issued today. Pricing should continue to be constrained by excess capacity and cost pass-through could be challenging in the second half of 2010. Excess or below-cost production should be limited.

'With capacity utilization in most regions above 70%, steel producers are better able to manage profitable production and prudent investment,' said Monica Bonar, Senior Director at Fitch. 'Producers with raw materials integration should do relatively better given the rebound in raw materials prices. '

Fitch believes that producers with relatively high exposure to value-added steel products should benefit from premium pricing and those with substantial operating scale, which can afford the ability to temporarily curtail production during lulls to reduce costs while serving customer demand, should also show sustainable advantage. Producers with relatively high exposure to construction in some developed countries will be disadvantaged as a result of credit- or fiscal-induced austerity spending levels over the next 18-24 months.

KEY Second Half 2010 THEMES/EVENTS:

--The possibility of fiscal austerity and its impact on the fledgling recovery in some developed nations is already disturbing capital flows and may result in slower growth. Most steel producers in Europe and North America have had a cautious approach to capacity restarts and should be able to manage profitably in a slow growth environment. Should a new crisis develop, producers will need to rely on liquidity and the strength of their capital structures.

--China is dominant, accounting for 47% of global steel production and 48% of global steel consumption in 2009. While demand continues to grow, capacity increases have been outsized. This results in a substantial overhang to the domestic market and limits price appreciation. Excess production would pressure the recovery in Europe and North America or exports from Russia and Brazil.

--Recent monetary tightening and efforts to cool property speculation in China may result in slowing domestic demand and excess supply. Cancelation of the 9% value added tax rebate on some steel exports beginning July 15, 2010 and a willingness to let the renminbi appreciate could constrain China's steel exports.

--Fitch expects results in the first half of 2010 for most steel producers to show the benefits of prices rising more than costs, improved capacity utilization, and improved demand for value-added steels. Results for the fourth quarter of 2010 should show seasonal weakness. Fitch expects reaction to a further demand slowdown to be swift and decisive.