Moody's Investors Service said that the outlook for the European steel industry is negative, reflecting weak demand that is not likely to improve until well into 2010, as well as depressed steel prices that are not likely to recover to levels required for appropriate long term returns in the near term. It added that furthermore, issuer ratings are being pressured by companies' worsening financial flexibility.
Mr Matthias Hellstern SVP in Moody's Corporate Finance Group said that "Moody's expects that the European steel industry will remain under pressure for the foreseeable future, but recognizes that the downturn may have finally bottomed out. Nevertheless, recovery is expected to be slow, since real demand for steel has declined by around 20% to 25%, lead times remain short and prices are expected to only marginally increase in the medium term."
Mr Hellstern said that "Although Moody's believes a further downturn, both in terms of steel prices and volumes, is unlikely, as prices and production have remained relatively unchanged for the past several months, steel prices are likely to remain depressed for several quarters due to overcapacity and the lack of an expected strong global economic recovery in the near term."
Moody's noted that steel prices dropped to EUR 320 to EUR 350 per tonne of hot rolled coil in Europe from EUR 800 within just a few months in 2008 and only recently started to rebound. Furthermore, between September and December 2008, steel production in the EU fell 47%, in the CIS, it fell 44% between August and December 2008, with no visible improvement in the first half of 2009.
Moody's also noted that companies with substantial acquisition-related debt and debt related to past shareholder friendly actions face ratings pressure, as their financial flexibility has worsened, as evidenced by increasing leverage ratios, covenant restrictions and to some extent the short term financing of acquisitions.
Mr Hellstern said that "Despite the high funds from operations generated in 2007 and 2008, companies' discretionary cash outflows more than offset the positive cash generated from the operating business. This left several companies vulnerable going into the current steep downturn, and therefore created pressure on their ratings."
Moody's said it would will continue to monitor events, with a particular focus on demand fundamentals and trends in key steel consuming industries, capacity utilization, inventory levels and price movements, global economic fundamentals, especially in emerging markets, liquidity positions, execution of cost reduction programs, changes to the regulatory landscape and import levels and pending trade cases.
Moody's currently rates 14 steel companies in Europe, located in Germany (two), Italy (one), Luxembourg (one), Poland (one), Russia (five), Turkey (one), Ukraine (two) and the UK (one).