Global steel price increases will be short-term

(Daiphuc corp) - The recent rebound in global steel prices will be short-lived, Fitch Ratings said, with prices starting to decline at the end of Q1 / 2021 as steel production continues to restart. Extremely large capacity for steel production suspended during the peak of the pandemic may return quickly enough to meet recovering steel demand and stockpiles, leading to rapid price rises.

Up to 30% of global steel production capacity (excluding China) has been shut down or mill output still significantly decreased due to reduced demand caused by the pandemic. However, the rebound in auto and home goods production was faster than expected when the most stringent sanctions were lifted. The construction sector is less affected due to the support of government stimulus programs in many regions. Steel mills restart was not fast enough to meet growing demand, while inventories fell to historic lows, with re-production across the entire steel value chain in Europe and America. creates additional demand. As a result, steel prices have risen in all regions by the end of 2020.
However, we do not expect these prices to be sustainable. Steel mills continue to rapidly restart with a capacity of around 30 million tons of hot metal back up and running since October. Many idling plants in the US and EU have come into operation, albeit one the production delay time increases completely. We expect the price to drop at some point in Q1 of 21 to levels closer to historical range throughout the cycle. Steelmakers are on high margins, with CRU's implied steel margins exceeding 30% in the EU and 45% in the US in January, although input costs are rising. High raw material costs may temporarily support steel prices given strong steel demand.
We believe that steel prices in China peaked in December 2020, when the country entered a period of seasonal lower demand, inventories increased and margins fell. We expect that China's steel demand in 2021 will be slightly lower due to the smaller scope of planned stimulus programs and a decrease in the possibility of steel goods exports.
The steel industry is still exposed to various risks that can affect demand, prices and margins, including pandemic-related risks, such as the spread of virus, slow vaccination and other risks. new strict lockout. Input costs will continue to affect steelmakers' profits and cash flows. Increasing steel demand is largely due to a rebound in the automotive sector, but a shortage of semiconductors is a risk for demand recovery to continue. Political and geopolitical developments, such as cuts in government stimulus programs, emissions-cutting policies and trade war, could increase pressure on the sector.
Given the short-term nature of the steel price rally, we do not expect any fundamental change in the credit profiles of our rated issuers. We expect most of the excess cash flows to be used by leveraged steelmakers within their internal goals, including ArcelorMittal, Russian steelmakers, Gerdau and Steel Dynamics, to Shareholder distribution or capital to make up for the 2020 cuts. Following the wave of M&A in this sector in the US in 2020, some manufacturers, such as US Steel and Cleveland-Cliffs, may Use the cash generated to reduce debt levels.


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