Fitch Sees Modest Recovery for Global Steel Demand
12/16/2009 - 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 recently issued Worldwide Steel Outlook.
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 recently issued Worldwide Steel Outlook.
Pricing should be constrained by excess capacity, according to the report, 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, Fitch reports.
"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 due to 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, according to the report.
Fitch identifies several key themes and events for 2010:
- China accounted 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, the report says. 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 to 20% in 2010 over 2009. Self-sufficient companies have likely trimmed the cost of downstream operations since the end of 2008 and should benefit, according to Fitch, 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, the company 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 Fitch expects this trend to continue until the recovery is well underway and lead times stretch.
The full report, Worldwide Steel Outlook: The Worst is Behind Us but so May Be the Best, can be found on Fitch Ratings' website at www.fitchratings.com.
