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Credit rating trends in the European metals and mining industry continue to be positive, owing to the expected favourable industry fundamentals throughout 2005, according to Industry Report Card: European Metals and Mining, a report released by Standard & Poor’s Ratings Services.

Stronger market conditions in each metals segment have resulted in substantial improvement in profitability measures and cash flow generation.
“Although Standard & Poor’s Ratings Services expects rating trends to stay positive in 2005, they will be tempered by higher levels of capital expenditure aimed at replenishing reserves, increasing production or efficiency enhancements, and share repurchases. In previous years, all of these were delayed by issuers to conserve cash when industry conditions were dismal,” says Standard & Poor’s credit analyst Tommy Trask. “The European steel market is now the most expensive in the world and increasingly at risk from rising imports. Inventory levels have recovered from late last year and demand is expected to remain flat in 2005. Nevertheless, the major producers remain optimistic about prices for 2005.”

Price increases in 2004 and 2005 appear sufficient to compensate for higher raw material costs, although this may change in the second half of the year. The market for higher-value-added steel, which is less susceptible to imports, is likely to remain strong for the foreseeable future, although commodity segments may suffer price reductions.

Steel makers are scrambling to secure alternative supplies of coking coal and iron ore as prices for these materials rise sharply. Even the lowest-grade iron ore reserves are attractive to steel makers in the current market. Many Commonwealth of Independent States-based steel makers have captive iron ore and coal supplies and should be well placed to benefit from the tight raw material situation. Western European steel makers, however, generally do not have access to their own raw material supplies and are likely to continue to be outperformed by their Russian and Ukrainian counterparts.
The report provides an overview of conditions in specific metal markets. In addition, it contains a summary of Standard & Poor’s opinion regarding each European company in the sector.