Following multiple negative rating actions in the past nine months, including the downgrade of the world's largest steel producer ArcelorMittal (BB+/Negative/B), Standard & Poor's Ratings Services' outlook for the steel sector in Europe, the Middle East, and Africa remains negative.
A report published on September 5th 2012, titled "EMEA Steelmakers Struggle With Faltering Demand, While Miners May Need To Cut Spending," explains that despite cost cutting and asset sales by some steelmakers, there may be additional downgrades ahead. The main reasons are an unfavorable global supply demand balance and particularly fragile demand in Europe, a region to which most of the steel companies we rate are exposed. In addition, Chinese steel growth has come to an abrupt halt.
S&P said that "Our outlook on the sector also factors in the risk of a genuine double dip recession in Europe in 2013, the probability of which we currently estimate at 40%. Under this scenario, we foresee further substantial weakening in steel demand, companies' margins, and balance sheets."
It added that "In contrast, the overall rating outlook distribution for miners is currently largely stable. We could, however, envisage more negative outlook revisions in the coming months, if notably iron ore prices don't recover from their recent steep falls or if companies are unable to curb spending and stem negative free cash flow. Mining companies' current ratings are, however, underpinned by their limited exposure to Europe, our base case expectation of a soft landing in China the key driver of metals demand and our view that management will take actions to adjust expansionary capital expenditure."
S&P said that "Most EMEA mining companies have greater headroom at their current rating level compared with steelmakers, thanks to modest leverage and balanced debt maturity profiles at the start of 2012. At the same time, we recognize that lower prices and cost inflation have led to a pronounced drop in profits, while high capex has led to negative free cash flow and increasing debt in the first half of 2012. Furthermore, prices across many commodities have continued to fall in recent months; the steep correction in iron ore price for instance to about USD 90 per tonne, from USD 140 per tonne in May 2012, is a rating concern as such spot prices are now well below our working assumption of USD 120 per tonne. Most of our negative rating actions in the past nine months were in the steel sector. We lowered the ratings on three steel producers and revised the outlooks to negative from stable on five."
Source - Standard & Poor's
(www.steelguru.com)
