Growth of demand on emerging markets is supporting long-term prospects of steel industry - Fitch

/IRBIS, October 19, 2011/ - Fitch Ratings believes that steel demand growth in China and emerging markets will be sustained in the range of 5%- 8% over the medium to long term, primarily benefiting lower- cost vertically integrated and diversified steel producers. As stated, this will partially offset weaker demand from developed markets, notably Western Europe and North America, supporting existing credit ratings across the sector. However, in the near term, Fitch expects steel demand fundamentals to remain under pressure to end-2012 as global economic conditions remain depressed. According to the World Steel Association, global apparent steel demand rose 10.1% in 2010. Fitch believes that this was largely due to the tail-end of the cyclical market recovery post the end-2008 economic crisis and that global demand will weaken to between 3% and 4% in 2012 before accelerating thereafter. Renewed economic concerns in the euro zone have lead to market participants adopting a 'wait and see' approach in Q311. This contributed to steel prices contracting by between 10% and 20% over the past quarter since end-June 2011. "The outlooks for the end-user sectors driving underlying steel demand in developed markets paint a weak short-term picture. The construction, automotive and manufacturing sectors are expected to remain challenged in 2012, with activity not yet recovering to pre- crisis levels. Furthermore, large-scale developed market austerity measures and growing concerns regarding the timely refinance of sovereign debt within the ruro zone will add to market uncertainty and adversely affect steel demand and prices in 2012, before recovering from 2013 onwards". Fitch does not expect developed market apparent steel demand to reach pre-crisis levels prior to end-2014. The recovery in real demand post the 2008 crisis has been uneven, with developed markets significantly underperforming emerging economies' growth. The World Steel Association reported that demand in China is currently 63% higher than 2007 (pre-crisis) levels, while demand in the US and Europe remains 13% and 20% below pre-crisis levels. The extent to which EMEA steel producers will benefit from robust emerging market economic and steel demand growth will however depend on a number of factors. Notably, the level of domestic capacity expansion undertaken / planned to meet higher steel demand, specifically in China, will drive absolute Chinese steel imports. China represents over one-third of global steel consumption and production, and will have to add capacity at a rapid rate to meet its domestic demand. Furthermore, steel companies' ability to control rising cash costs in high inflation production environments will be key in sustaining profitability and taking advantage of emerging market demand growth. However, emerging market steel demand growth comes off a low base, with key indicators for infrastructure development setting the scene for continued growth over 2011 to 2020. In 2008, the US reported urban residential floor space per capita of 78 sq/m, compared with China at only 13 sq/m. Railway kilometres per 1000 sq/m in the US was at 23 in 2008, against 8.3 in China. Similarly, total roads (km per 100 sq/km) in the US were 658km, compared with 390km in China. [2011-10-19]