According to Fitch Ratings' 2009 global steel outlook report issued on January 2, Fitch expects the current sharp contraction in steel demand to continue to weigh on steel production and pricing through the first half of 2009. While in the short-term the steel market will be in a downturn, the Ratings Outlooks on the vast majority of Fitch Ratings' steel coverage are stable.
Demand for steel has weakened sharply since August 2008. The global financial crisis reduced construction activity worldwide as well as consumer demand for durable goods. The resulting fall in steel demand and prices has been met with substantial production cuts around the world. Global steel production declined 12.4 percent year-over-year in October 2008, following a 3.2 percent year-over-year drop in September 2008. The cuts that have been announced will result in sharply lower production through the first quarter of 2009.
Tight credit and the need to generate cash flows have resulted in extreme destocking industry-wide, and this has been amplified at the raw materials level.
Demand for steel should improve following the aggressive expansion of central bank liquidity provisions since early September, in combination with major fiscal injections into the
Spot raw materials prices have fallen sharply following destocking and declining steel production. Contract prices for iron ore and metallurgical coal are expected to be 20%-40% lower than last year. Freight rates have fallen as well, which should result in lower costs going forward.
Key 2009 Themes/Events:
· Companies with strong balance sheets and flexible operations will fare best over the downturn. Flexible operations will allow production cuts to optimize profitability and conserve cash. Low debt-service and/or access to capital will be supportive during a period of very low shipments and poor operating profitability. Focused working capital management will benefit cash flows.
· Earnings will generally be down substantially for the next 12 months from 2008, which benefited from a robust first half.
· 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.
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· Consolidation may be more regional and driven by the need to rationalize capacity and cost structures, although activity has virtually halted following the advent of the credit crisis.
The full report “Worldwide Steel Outlook: Short-term View Is Dismal” can be found on the Fitch Ratings Web site at www.fitchratings.com.
