In its report ‘2011 Outlook: Steel Producers', the global ratings agency Fitch Ratings has predicted a stable outlook for the steel sector in 2011, adding that a slow and steady recovery pace for steel demand is expected to continue over the next 12-18 months, but not to reach peak levels for developed nations until 2013.
Accordingly, in 2011, pricing should continue to be constrained by excess capacity, and raw material cost pass-through could be challenging. Excess or uneconomic production should be limited but new capacity is expected in emerging Asia.
Inventories of steel products are expected to remain lean compared to historical levels given reasonable lead times and slack in capacity utilization levels, Fitch said.
Fitch also noted that regional differences in steel market dynamics will be a major influence on steel producers' profitability and cash flow generation. Worldwide steel trade fell more than production during the downturn as a result of sharply lower demand in importing nations, coupled with low capacity utilization and short lead times at domestic steel mills. Producers relying on exports will be exposed to price competition approaching marginal cost, intensifying trade barriers, and currency fluctuations. In particular, the strengthening of the Japanese yen is hurting competitiveness at export manufacturers, the agency said.
Fitch also expects the investment activity to increase and be focused on raw materials integration, emerging Asia, value-added production, and cost improvement. Divestiture or closure of underperforming assets in Europe and North America may accelerate. Fitch expects increased dividends and share buyback activity to be rare.
According to Fitch, producers are expected to show a sustainable advantage, include: those with raw materials integration depending on the cost position of captive capacity; producers with relatively high exposure to value-added steel products given premium pricing; and producers with substantial operating scale, affording the ability to temporarily curtail production during lulls to reduce costs while serving customer demand.
Meanwhile, high exposure to construction in some developed countries will result in some producers being disadvantaged as a result of credit- or fiscal-induced austerity spending levels over the next 18-24 months, Fitch said.
Fitch expects the recovery for steel and steel raw materials to stretch into 2012, and foresees a soft landing for China and a continued slow economic recovery for developed nations.