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Fitch Reports Global Steel in Recovery
06/29/2010 - 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 most recent “Worldwide Steel Outlook.”
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 most recent “Worldwide Steel Outlook.”
The report also notes that 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 is expected to 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; 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, it says.
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, according to Fitch.
Among key second-half 2010 themes/events is the possibility of fiscal austerity and its impact on the fledgling recovery in some developed nations, which 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, according to the report, and should be able to manage profitably in a slow growth environment.
According to the report, 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. Fitch says that 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, the report states.
Recent monetary tightening and efforts to cool property speculation in China may result in slowing domestic demand and excess supply. Cancellation 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.
