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Moody's revises European steel industry outlook to stable

Moody's Investors Service today changed its Industry Sector Outlook for the Europe, Middle East and Africa (EMEA) steel industry to stable from negative. The outlook expresses Moody's expectations for the fundamental business conditions in the industry over the next 12 to 18 months.

The revised outlook is driven by Moody's view that overall volumes in the region should grow slightly on the back of a slow recovery in customers' activity, while steel manufacturers should remain disciplined in capacity development with an ability to at least protect recent pricing levels.

“With the recent increase in both production volumes and prices, Moody's believes that a repetition of events of the first three quarters of 2009, when steel production in the EU fell to around 9 million-10 million tons per month, compared to 15 million-19 million tons in 2008, is unlikely to occur again in the short to medium term," says Matthias Hellstern, a Moody's senior vice president. “In the meantime, steel production reached 13.5 million tons in January 2010, an increase of more than 30% from the lows recorded in the first half of 2009.”

In Western Europe in 2009, the level of steel production declined much more sharply than the real demand for steel. Therefore, on average, steel production levels in the short to medium term should stay above the levels seen in 2009.

However, Moody's cautions that there could still be periodic setbacks, triggered by the continued weakness in the major end-user sectors for steel, such as car manufacturers and construction, and due to the usual destocking and restocking cycles.

“In Moody's view, overcapacity remains a key risk for the industry globally,” says Hellstern. “Although we do not expect steel imports to flood Europe in 2010, this remains a risk as China continues to expand its steel production. In addition, the premature restart of idled capacity in Europe and other parts of the world could derail the improvement that is beginning to take shape.”

Further risks remain related to the recent hikes in input prices for steel production, such as for iron ore or coking coal. This could hurt profitability and have negative credit implications for the steel industry in mature countries, especially for steel producers that do not have their own iron ore or coking coal reserves.

Although steel producers in the Commonwealth of Independent States (CIS, predominantly Russia and the Ukraine) do not expect any material recovery in domestic demand, the recent development in iron ore prices should help them to sustain cost pressure and preserve profit margins due to their vertical integration into raw materials mainly iron ore and coking coal. In spite of a slow recovery in domestic car production and consumption and a still sluggish construction sector, the capacity utilization rates for producers in the CIS remain high (90%-95%) as export sales continue to account for a major part of their revenues. (BBJ Online)