Moody's: Outlook on Europe's steel sector turns negative as sinking prices eat profits

Moody's Investors Service has changed its outlook for the European steel sector to negative as the sharp fall in steel prices weighs heavily on profitability such that it will take at least 18 months to return to levels close to those of 2014. However, Russian steelmakers' lower costs supported by rouble depreciation make them more resilient to steel price declines.

"Our outlook for the European steel sector has turned negative as we expect steelmakers' earnings to stagnate or fall this year on the back of slumping steel prices. Stabilization of prices at low levels, sluggish or declining demand growth outside Europe and high levels of cheap Chinese imports will keep steel prices under pressure for at least the next year," says Hubert Allemani, a Moody's Vice President -- Senior Analyst and co-author of the report.

While the purchasing managers' index (PMI) and steel sector's capacity utilization - two key outlook drivers - indicate economic expansion, the substantial, longer-term downturn in prices and high levels of cheap imports eroding European mills' market shares outweigh the benefits of moderate growing demand in Europe.

The large volume of cheaper steel products imported from China and the rest of Asia are pressuring European steel manufacturers' margins, which are declining despite the prevailing low raw material cost environment. In response to rising imports and falling prices, many manufacturers are adapting their production output.

In the absence of price discipline from China, any improvement in steelmakers' profitability will most likely come from capacity cuts and/or other cost reductions as they adapt their cost structure to cope with lower steel prices.

Russian steelmakers are better positioned to cope with the ongoing decline in both domestic and export prices because their costs are lower than their European peers, particularly supported by the rouble depreciation.