"Keeping our outlook on the European steel sector stable reflects the expectation that steel consumption will grow by around 1.5%-2% in 2017-18 on the back of improving economic prospects and demand growth from the automotive, construction and capital goods markets," says Gianmarco Migliavacca, Vice President -- Senior Credit Officer at Moody's.
European steelmakers should also see a boost in profits as demand growth, stable raw material prices and anti-dumping duties look set to support higher steel prices for the next 12-18 months. The supportive operating environment should translate into higher average steel spreads in 2018 compared with 2016, although at slightly lower levels than in 2017 as we assume a moderation in European steel demand next year compared to 2017.
Average capacity utilization rates at European steel mills should remain below 85%, which is within our range for a stable sector outlook. Structural overcapacity and rising imports from countries not subject to EU anti-dumping tariffs, like South Korea, Turkey and India, remain constraining factors. According to trade body Eurofer, imports rose by 5% in the 12 months to May 2017, although the growth rate was slower than the 10% recorded in 2016.
In addition, M&A in the sector is unlikely to translate into immediate reductions in the industry's overcapacity. ArcelorMittal's (Ba1 stable) acquisition of Ilva (unrated) aims to increase steel production in southern Europe rather than rationalize production. Similarly, thyssenkrupp AG's (Ba2 developing) planned joint venture with Tata Steel Ltd. (Ba3 negative) may only consider consolidating production after 2020.
Potential protectionist US trade policies could also pose a threat to Europe's steelmakers. Import restrictions could create ripples, currently difficult to quantify but potentially large, in the global market likely to weaken the European steel sector, especially if they lead to increased imports into Europe from countries which would have targeted the US market instead.
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