Negative outlook for European steel industry

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. Furthermore, issuer ratings are being pressured by companies' worsening financial flexibility.
"Moody's expects that the European steel industry will remain under pressure for the foreseeable future, but recognises that the downturn may have finally bottomed out," said Matthias Hellstern, a Moody’s Senior Vice President.
"Nevertheless, recovery is expected to be slow, since real demand for steel has declined by around 20-25%, lead times remain short and prices are expected to only marginally increase in the medium term."
Steel prices dropped to EUR 320-350 per metric ton of hot rolled coil in Europe from EUR 800 within just a few months in 2008 and only recently started to rebound, reaching nearly EUR 400. 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.
"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," cautioned Hellstern.
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. "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," explained Hellstern. "This left several companies vulnerable going in to the current steep downturn, and therefore created pressure on their ratings." Although some issuers have taken steps to increase their flexibility, such as by lengthening their debt maturity profiles or drastically reducing capital expenditures, others are more constrained in implementing such measures due to prior commitments.
Nevertheless, Moody's recognises that there are a few bright spots on the horizon: demand in China remains robust; and CIS producers posted positive operating margins in Q1 2009 for their domestic operations. However, the development of Chinese exports remains an industry wildcard and the ratings of some CIS producers are pressured by substantial short-term acquisition-related debt.
Moody's currently rates 14 steel companies in Germany, Italy, Luxembourg, Poland, Russia, Turkey, Ukraine and the UK.