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The near-term outlook for credit quality in the global steel and base metals industries is decidedly stable due to strong metals prices and demand over the past several months, with the European industry expected to follow a similar trend, according to a new report released today by Standard & Poor’s Ratings Services.
“With favourable industry fundamentals likely to continue at least through early 2005, credit quality among global metals and mining companies is likely to lean toward a positive bias,” says Standard & Poor’s credit analyst Tommy Trask. “Eleven of the European metals and mining issuers that Standard & Poor’s rates have a stable outlook and two have a positive outlook, with only one having a negative outlook.”
The pace of positive rating actions could accelerate as favourable market conditions persist and companies continue to apply increased cash flows toward reducing their financial risk, including debt reduction and, in some cases, funding pension and other post-employment benefit plans. Standard & Poor’s expects that rating upgrades for the rest of 2004 will remain muted, however. Debt reduction initiatives could be tempered somewhat by increased capital expenditures aimed at replenishing reserves or increasing production following years of limiting capital expenditures to conserve cash when industry conditions were dismal.
The European steel industry is now enjoying a rare moment of strong profitability and cash generation with 2004 expected to be the strongest year for the steel industry in a decade. With European steel, iron ore, and coke prices at record levels, the integrated companies and those that have secured raw materials and energy under long-term contracts are set to benefit the most.
The strong market conditions do not allow for complacency, however, with new capacity coming on stream in many parts of Eastern Europe and the former Soviet Union states. If and when China becomes self sufficient or a net steel exporter, steel from the Commonwealth of Independent States (CIS) will likely find its way into Western Europe in greater quantities, as CIS steelmakers remain dependent on exports.
The report titled Industry Report Card: European Metals and Mining was published on July 30 and is available to subscribers of RatingsDirect, Standard & Poor’s web-based credit analysis system, at