According to a special global report issued on June 23 by leading global ratings agency Fitch Ratings, weak steel demand will continue to weigh on steel production and pricing through the year with some improvement in the second half from destocking.
The Fitch report notes that demand for steel has weakened sharply since August 2008 with the global financial crisis reducing construction activity and capital spending worldwide. The resulting fall in steel demand and prices has been met with substantial production cuts around the world.
The report goes on to state, "China's steel production is gaining again and its domestic steel prices are rising modestly which may further slow efforts to shutter high-cost and environmentally unfriendly production. The reinstatement of export tax rebates on some steel products may result in excess production pressuring weak markets elsewhere."
"Integrated steel producers generally require operating rates in excess of 60 percent to generate positive cash flow; the requirement could be higher depending on the fixed nature of their raw material supply. Electric arc furnace steel producers tend to have a more flexible cost structure and, depending on the fixed nature of their raw material supply, can generate positive cash flows at rates above 45 percent," the Fitch report added.
The Fitch report continued, "There will continue to be pressure on contracts if not outright defaults. As capital is stretched some firms will have no option but to refuse delivery in the absence of renegotiation of price. Demands for credit support will likely continue to increase and further constrain trading activity."
As a result, Fitch expects the earnings and cash flows of steelmakers to suffer during this period of very low demand. Fitch estimates that a rebound in real demand will require a strengthening in consumer and investment spending, which may just be bottoming out, in addition to government stimulus spending which has yet to result in material new orders. Fitch does not expect real demand to begin to recover much before the fourth quarter of 2009.