09.06.2015

Moodys, London

Falling steel prices not enough to change stable outlook for European steelmakers

Low steel prices will hurt profitability, particularly for steelmakers with large US exposure, according Moody's Investors Service. However, volumes output continue to be supported by strong and growing demand from the European car and construction industries, which together account for more than half of the region's steel consumption. The report titled "Downward Pressure on Steel Prices not Enough to Change Stable Outlook" is now available on http://www.moodys.com/ .


"Despite falling European steel prices, steel used by the automotive industry and for mechanical engineering has been on an upward trend since the end of 2014 driven by better GDP growth prospects. We expect apparent consumption will rise by 1% to 1.5% in 2015", said Hubert Allemani, vice president and analyst for European steel at Moody's.


Capacity utilisation, one of Moody's European steel outlook drivers, has been mostly steady since the beginning of the year. Moody's estimates that capacity utilisation in the EU has been around the 75%-80% range forecasted in the rating agency's September outlook, with a slight improvement for a few companies to levels close to or above 80%. The ratio remains within Moody's range for a stable outlook and is expected to stay at that level in 2015.


The average prices for European hot-rolled coil (HRC) and cold-rolled coil (CRC) products fell sharply from May 2014 to January 2015 and have since stabilised. However, declining raw material prices, sluggish demand growth outside Europe and high levels of imports from Asia will keep prices under pressure in 2015 with limited recovery prospects.


Moody's notes that iron ore prices (62%Fe) have fallen sharply from highs of $135 per tonne in January 2014, dipping to below $50 per tonne in April 2015, before rising slightly to current levels of around $60 per tonne. The fall is mainly owing to decreasing domestic Chinese steel production combined with increasing output from the major mining companies. Coking coal prices have shown a similar downward trend. In April, Moody's lowered its 2015 expectations for iron ore to a range of $40 to $50 per tonne based on stable supply/demand dynamics.


Moody's would move the outlook to negative if the Eurozone Composite Output Purchasing Managers' Index (PMI) falls below 50, which indicates a contraction, for at least three consecutive months and the capacity utilization rate falls below 75%. Conversely, the rating agency would move the outlook to positive if the PMI exceeds 55 for at least three consecutive months and capacity utilization rate rises to more than 85%.


Subscribers can access the report via this link.


 


Moodys, London