The demand for steel should rebound at a "modest pace" over the next 12-18 months, with the industry expected to be able to pass along higher raw materials costs, the leading global ratings agency Fitch Ratings has stated in its special report entitled, "Worldwide Steel Outlook - The worst is behind us, but so may be the best", adding that further price hikes should be constrained by excess capacity.
"Regional differences in steel market dynamics have re-emerged and will be a major influence on steel producers' profitability and cash flow generation. Producers relying on exports will be exposed to price competition approaching marginal cost, intensifying trade barriers, and currency fluctuations," reads Fitch's report.
Most of the companies rated by Fitch showed improvement in their liquidity cost reductions, working capital management, dividend reductions, spending reductions, capital raisings, and/or credit facility amendments. "These measures should serve well over this period of slow recovery, and financial leverage should decline over the year," states Fitch, adding that the ratings remain under pressure given the severity of the downturn and limited visibility on the recovery.
Fitch said that the steel industry's performance in the first half of 2010 should be an indicator of strength and sustainability of the recovery. For the world excluding China, Fitch doesn't expect demand to reach peak levels until 2013 at the earliest, given declines expected in construction for developing nations and slow recovery in other manufacturing sectors. Chinese demand will grow in 2010 but will be affected by the outsized increases in capacity, which, coupled with high stocks at traders, results in a substantial overhang to the domestic market and limits price appreciation, Fitch said. Chinese steel producers are likely to invest in a low-cost raw material supply.
In addition, Fitch said that it expects blast furnace steel producers to see margin recovery in 2010, but expects profitability to remain well below the 2007-2008 peak levels.
Meanwhile, Fitch notes that the steel prices will approximate the marginal cost of production while capacity utilization will be below 75 percent. "Given expectations of increased iron ore and met coal prices, Fitch believes US hot rolled sheet will trade at an average $600/mt in 2010," reads the agency's statement, adding, "Strengthening of Russia's ruble or China's renminbi could result in production cuts and drive prices higher."
Prices of raw materials are expected to be 15-20 percent higher in 2010 over 2009. Fitch believes that the 2010 benchmark iron ore price settlement will be in the range of 15-20 percent higher than the current benchmark contract price of $54/mt FOB settled by Vale, or the $62/mt FOB contract price settled by Rio Tinto last year. The scrap prices are expected to be highly variable over the next 12-18 months but to be up about 20 percent on average from the low levels in 2009. Meanwhile, the benchmark hard coking coal contracts are expected by Fitch to be settled about 30-50 percent higher for 2010 than 2009, reflecting currency movements as well as tight supply. The wide range allows for more swing production including from China, the agency said.