The recent steel price rally does not signal improved demand and will provide only a temporary boost to producers, said Moody’s Investors Service.
Since December 2015, steel prices have increased by about 55% after hitting a 7-year low, with production and capacity utilization rates firming. Hot rolled coil prices rose to $550 per ton in May 2016 from $355 per ton in December 2015, while utilization rates rose to 72% in April from 63% in December. Overall the rally is expected to expand margins and improve operating results for the domestic steel sector versus those in recent quarters.
In a new report, “Recent Steel Price Spike Unlikely to Be Sustained,” Moody’s indicated the rally has been driven by temporary supply side factors that were likely to wane in the near future, noting that steel prices and utilization rates remain at historically weak levels. The ratings agency noted that industry conditions would not support materially improved credit profiles for the rated steel producers.
“Despite this recent spike, the underlying issues that plagued the domestic steel industry last year will persist in 2016,” commented Moody’s Vice President Michael Corelli. “We’re still seeing significant excess worldwide steel and raw material capacity along with softening demand and economic growth.”
Moody’s said that imports have ebbed due to the softening US dollar and relatively favorable preliminary trade case rulings, both of which had provided a boost to the domestic industry. However, Moody’s analysts said the recent aggressive price rise is likely to attract higher imports soon, especially if final trade case determinations are not as favorable as anticipated.
Another driver behind the steel rally has been the uptick in raw material prices as China’s government stimulus spending and looser monetary policies have lifted economic activity and spurred steel demand and prices. Still, Moody’s said the fundaments do not support the resulting price rise and that supplies continue to substantially outweigh demand, and will lead to lower prices in the near term.
Going forward, the domestic steel producers are approaching a seasonally soft period, as both the oil and gas and mining sectors remain very weak with slowing industrial production. Moody’s expects that while idled domestic steel capacity and inventory restocking are supporting higher prices, steel demand is likely to weaken once inventory restocking is complete.
Source: Moody’sPrevious Next