The credit agency Moody’s has downgraded its forecast for the European steel industry from “stable” to “negative”, but said Luxembourg’s ArcelorMittal was “less vulnerable” to some of the economic headwinds.
Moody’s European steel sector outlook had been stable since April 2017, but on Wednesday it cited “slowing economic growth”, sluggish market demand, rising costs, “political uncertainty” and overcapacity in a research note.
The agency wrote that “steel capacity utilisation in Europe is about 76%,” with little industry consolidation in sight. Moody’s noted that:
“ArcelorMittal… has decided to temporarily cut its annual steelmaking capacity in Europe by 3 million tons this year, or 6.7% of its 2018 total European steel production, due to falling demand, rising imports and ineffective trade protection measures, but this will not be enough to meaningfully address domestic overcapacity.”
Lower steel prices and higher input costs:
“… will weaken the profitability and cash flow generation of steel producers using blast furnace steelmaking technology. Integrated companies which produce iron ore for their own use such as ArcelorMittal will be less vulnerable.”
“This outlook reflects our expectations for the fundamental business conditions in the industry over the next 12 to 18 months,” the analysts wrote. However:
“We would consider changing the outlook back to stable, if Markit Eurozone manufacturing PMI exceeded 50 for at least three consecutive months, steel consumption in Europe visibly strengthened, pressure from imports moderated and if steel spreads were to at least stabilise around current levels.”
Earlier this month, ArcelorMittal reported lower operating income and higher debt for the first quarter of the year. Lakshmi N. Mittal, the company’s chairman and CEO, stated that shoring up ArcelorMittal’s balance sheet was a “priority”.