Recovering steel prices and improved industrial output expected in the European Union are expected to boost producers' profits over the next 12 months prompting a change in the outlook for the European steel sector to stable from negative, Moody's Investors Service said in a report today.

The outlook reflects Moody's expectations for the fundamental business conditions in the industry over the next 12 to 18 months.

The report, "Steel -- Europe Sustainably Higher Prices, Better Growth Prospects Turn Outlook Stable", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Steel prices have remained at three-year highs since the strong rebound in the first quarter of 2016, alleviating concerns about how long the recovery would last," said Hubert Allemani, a Moody's Vice President -- Senior Analyst and the report's author. "While European prices may soften during the second half of this year because of a retreat in the cost of raw materials and seasonality, we do not expect a significant decline."

Moody's believes that European steelmakers have secured much better contracted prices with their clients than a year ago when prices were at historic lows, which should lead to solid first-half results.

Better prospects for the construction industry, the biggest steel-using sector in Europe, and stable demand from car manufacturers should also support steelmaking in the region. Together with improved consumer confidence, manufacturing in the euro zone has gained momentum and the strengthening of industrial activity should support demand for steel.

However, imports will continue to take some of the expected demand growth away from European steelmakers. This remains a key concern for the sector because the expected demand growth will remain low, at less than 2%.

Steel producers' input prices have been rising since the beginning of 2017, putting pressure on their profit margins.

Moody's could change the outlook to negative if the rating agency was confident that the Markit Eurozone Composite PMI would fall below 50 for three consecutive months, indicating economic contraction, and capacity utilization would fall below 75%. Moody's could also change the outlook to negative if prices fell to levels close to those at the end of 2015, indicating a risk that steelmakers' profitability could fall, even if the European economy continued to grow.

The outlook could move to positive if the PMI exceeded 55 for at least three consecutive months, capacity utilization rose to more than 85% and if Moody's was confident that prices would remain strong and stable.