The FINANCIAL — London-10 October 2011: Fitch Ratings believes that the ratings impact of recent falls in steel prices for European steel companies should not be overstated.
Current steel prices, while 20%-25% lower than recent peaks, remain at levels more than double that at the worst of the 2008/09 downturn.
"Steel demand and prices do show regional variations, and while there has been downward pressure on prices from a combination of weakening real demand and import competition from Russia and the Ukraine, prices in Europe are still at levels at which rated entities can continue to be profitable," says Peter Archbold, who leads Fitch's metals and mining coverage in Europe. "The European industry is highly concentrated and has the flexibility to move production between sites to ensure continuing profitability. The industry as a whole should also benefit from the lessons learnt in dealing with the recent financial crisis induced recession."
ArcelorMittal S.A. ('BBB'/Negative), the largest European producer, continues to actively manage plant usage to ensure high utilisation rates at the plants which are operating. It is typically more efficient from a cost perspective to have one plant operating at close to full capacity compared to operating two plants at 50% utilisation. ArcelorMittal has recently idled several steel facilities within Western Europe for this reason.
Even if steel prices were to fall further, the industry is in far better shape than it was going into the 2008-2009 recession. As with much of the corporate space, balance sheets are more conservative, maturity profiles longer and cash positions higher, giving companies far more flexibility to deal with any downturn. Furthermore, many of the companies, such as Thyssenkrupp AG ('BBB-'/Stable), which went into the crisis overextended due to large recent acquisitions or committed capex programmes, have recovered from this position.
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