Moody's Lowers Outlook on U.S. Steel Industry to Negative (X) (WOR) (STLD) (NUE)

The outlook for the US steel industry has been lowered to negative from stable, Moody's Investors Service says in a new report. Prices have collapsed across all grades of steel and capacity utilization rates remain weak.

For the US steel industry, the drivers for an outlook change are capacity utilization rates below 75% and a US purchasing managers' index (PMI) of less than 50. Industry outlooks reflect Moody's expectations for fundamental credit conditions in a given sector over the next 12-18 months.

"Capacity utilization rates for the US steel industry through the week of 25 April stood at 72.4%, against 77% for the comparable period last year," says Senior Vice President, Carol Cowan. "While severe weather hindered movement of input materials and product in the first four or five months of 2014, the lower utilization rates seen so far in 2015 are indicative of fundamental market and supply/demand issues and will take more time to correct."

Market and supply/demand issues will weigh on capacity utilization rates through the outlook horizon, Cowan says in "Low Prices, Weak Capacity Utilization Turn Outlook Negative." Moody's expects utilization rates to range between 70% and 74% in 2015. And while the PMI remains above 50, it has been declining since October last year. In April it came in at 51.5, flat with March, but down from 52.9 in February.

Selling prices have fallen rapidly this year and are now at levels that will negatively affect steel makers' profitability. Hot rolled coil prices, for example, averaged $494 per short ton through April this year, well below the $657 average for 2014. Steel companies have recently announced a $20 per short ton price increase, but whether it will stick remains to be seen.

Several reasons account for the price decline, including the recent drop in oil prices, which has prompted a significant pullback in drilling activity and in turn affected companies such as US Steel and Evraz North America, which sell into the oil country tubular goods, or OCTG, market. Additionally, import levels remain high, a situation that is likely to continue given the strength of the US dollar. Imports of finished steel were up 35% year-on-year through 31 March.

"While the automotive market remains relatively robust and construction continues to slowly improve, the collapse in the OCTG market and weak demand in equipment markets will dull these brighter spots," Cowan says. "We see no catalyst that would lead to material improvement over the next several quarters, and risk remains to the downside."

Moody's research subscribers can access this report at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1005039.

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