Ongoing Improvement For U.S. Steel Industries But Macroeconomic Risks Remain

by: Research Recap

Fitch Ratings expects further credit and operating improvements for U.S. steel producers in 2012 although downside risks from developed markets remain.

Risk aversion earlier in the fourth quarter 2011 resulted in investment and stocking pullbacks and weak pricing, which resulted in lower earnings for the quarter relative to the second and third quarters. Demand is slowly growing from the auto, energy, and heavy equipment manufacturing segments, while construction has bottomed out.

Fitch expects steel demand to continue to grow, not reaching full recovery until 2013 at the earliest.

The U.S. steel industry is challenged by low capacity utilization (about 75% on average in 2011) as a result of weak order rates. Margins are vulnerable when capacity utilization is below 80%, especially in a rising/high raw material cost environment. New capacity in flat-rolled steel may take upwards of 18 months to be absorbed. Fitch expects average capacity utilization to rise but not to reach 80% on average in 2012.

Downside risks to growth expectations should result in conservative working capital management and capital spending in 2012. Most companies have raised capital and expanded and extended revolving commitments since the first quarter of 2009.

The rising share of raw materials costs to total costs has narrowed the gap between marginal cost and average cost. Producers 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.

The Rating Outlook for the U.S. steel industry is Stable.