Profitability of European steelmakers expected to stay low, says Moody's

However, improved output and plant capacity utilisation rates will not be enough to merit a change in outlook from ‘stable’ to ‘positive’, the ratings agency said in a note to clients.

Steel output in Europe continues to be supported by strong and growing demand from automobile and construction industries, which together account for more than half of regional steel consumption.

Hubert Allemani, vice president and analyst for European steel at Moody's, said: “Despite falling European steel prices, steel used by the automotive industry and for mechanical engineering has been on an upward trend since the end of 2014 driven by better GDP growth prospects. We expect apparent consumption will rise by 1% to 1.5% in 2015.”

Capacity utilisation has been mostly steady since the beginning of the year; around the 75%-80% range according to Moody’s, and is expected to stay at that level in 2015.

The average prices for European hot-rolled coil (HRC) and cold-rolled coil (CRC) products fell sharply from May 2014 to January 2015 and have since stabilised. However, declining raw material prices, sluggish demand growth outside Europe and high levels of imports from Asia will keep prices under pressure in 2015 with limited recovery prospects.

Moody's noted that iron ore (62% Fe grade) prices have fallen sharply from highs of $135 per tonne in January 2014, dipping to below $50 per tonne in April 2015, before rising slightly to current levels of around $60 per tonne.

The fall is mainly owing to decreasing domestic Chinese steel production combined with increasing output from the major mining companies. Coking coal prices have shown a similar downward trend. In April, Moody's lowered its 2015 expectations for iron ore to a range of $40 to $50 per tonne based on stable supply-demand dynamics.

Finally, the agency cautioned it would move the steel sector’s outlook to ‘negative’ watch if the Eurozone Composite Output Purchasing Managers' Index (PMI) falls below 50, which indicates a contraction, for at least three consecutive months and the capacity utilisation rate falls below 75%.

Conversely, Moody’s would move the outlook to positive if the PMI exceeds 55 for at least three consecutive months and capacity utilisation rate rises to more than 85%.