Moody’s foresees European demand decline, profitability improvement barriers

European apparent steel consumption will fall -2% over the next 12-18 months as weaker macroeconomic conditions and waning consumer confidence weigh on demand, according to Moody’s.

The credit rating agency has revised down its forecast for eurozone real GDP growth by 0.2 percentage points and 0.1pp respectively in 2019 and 2020 to 1.1% and 1.3%. Moreover, the IHS Markit Eurozone manufacturing purchasing managers’ index (PMI) has been below 50 since February 2019.

“We expect conditions in the European manufacturing industry to remain highly fragile because of the potential for trade tensions between the US and its main trading partners to deepen and because the likelihood of the UK leaving the EU without a deal has increased,” Moody’s says in a report sent to Kallanish.

Automotive steel demand will also weaken – Western European light vehicle sales will decline -2% in 2019 and -3% in 2020, Moody’s adds. Auto steel suppliers “…will face sustained headwinds in the next 12-18 months, with lacklustre auto sector demand constraining steel shipments, orders and top line growth,” the firm says.

European construction industry demand remains healthy, but this is likely to soften in 2020 as confidence deteriorates.

Continued global steel overcapacity is adding to these woes. Impetus for consolidation is unlikely in the next 12-18 months after the European Commission rejected the planned merger of thyssenkrupp’s and Tata Steel’s European steel operations.

Europe continues to face elevated imports despite safeguard quotas. The European Commission has proposed including more products in the quotas and to reduce the annual quota relaxations to 3% for the next two measurement periods of July 2019 to June 2020. This will bring some relief, but “…we believe the EU steel market will remain popular for existing key supplying countries and those not yet affected by country-specific quotas,” Moody’s observes.

European mills are simultaneously exporting less. High-quality flat products shipments to the US remain high, but may not be for long as they go mostly to the automotive sector which is expected to shrink this year and next.

Moody’s expects steel spreads in Europe to remain around their currently low levels of €270/tonne ($294) in 2019, possibly rising towards €300/t during 2020. This compares to the average spread of €385/t in 2018 and €355/t in 2017. “The spread forecasts reflect our expectation that steel prices will remain low and raw material costs will be higher, making it difficult to improve profitability,” the firm says.

“We do not expect further significant raw material price declines in the next 12-18 months and volatility will remain high,” Moody’s comments. “At the same time, potential for steel price improvement remains very limited, given bleak market sentiment and weak demand prospects. Steel prices in China, which accounts for more than 50% of global steel production, have also started to soften after holding up in the first half of 2019.”