Fitch Ratings is projecting slow and steady improvement in the global steel industry, but it doesn't mean that significant challenges don't lie ahead for North American and European producers. In its Worldwide Steel Outlook released earlier this week, the New York-based ratings agency said in the report steel demand won't reach peak levels in developed nations until 2013 and excess production should be limited because of market uncertainties.
Through the end of the second quarter, most steel producers should show benefits of prices rising more than costs, improved capacity utilization and improved demand for value-added steels, the report said. Capacity utilization in the United States is projected to be between 70 and 75 percent on average this year. In order to best the 75 percent mark, Fitch analyst Monica Bonar said the demand would have to trump the cautious steel buying currently in the market.
"There is pent-up demand, but it won't 'unpent' unless there's a reason to," Bonar said. "People are producing to their order books. There's some thought that some demand is restocking, but I haven't seen service center discussions that (say) 'I might as well buy now because it will be higher later.' "
If a new crisis were to develop, steel producers in Europe and North America, who have already been cautious about restarting capacity, will have to rely on their liquidity and capital structures to get them through the hard times, Bonar said.
Producers that have a strong reliance on construction activity and product exports are expected to face difficulties. Producers that rely on value-added steel products for revenue will have a better advantage to a capture premium prices.Fitch said merger and acquisition activity should focus on raw materials integration and there also could be "opportunistic integration" into service centers should they become distressed.The report said China accounted for 48 percent of global steel consumption in 2009 and while demand continues to grow, excess production could impact the recovery in Europe and North America or exports from Russia and Brazil. The bright spot offered is that the country's government may be willing to let its currency appreciate in value and slow down excess supply and domestic demand. Steel prices should hover around their marginal cost while capacity utilization is less than 75 percent, the report said. Iron ore production will be "managed to just meet demand" in 2010 and 2011 with a modest excess supply level in 2012.
The hard coking coal market will be "fundamentally tight" and production disruptions should show in price movements. Fitch projected that scrap prices should finish 2010 with moderately lower prices than those seen in the second quarter. But the price of scrap isn't expected to drop below $300 per ton in the next 12 to 18 months.