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Fitch: Steel profits could vary
Fitch Ratings said that steel producers that own raw materials could outpace those that do not, as the industry sees contract iron ore prices soar. The agency noted that it is unlikely to affect ratings as they already consider raw material ownership.
The agency said the 65% year-on-year increase in the contract iron ore price agreed this week, between Vale (BBB-/positive) and several steel companies including Nippon Steel (A-/F2/stable), Posco (A-/F2/stable) and ThyssenKrupp (BBB+/F2/stable), exceeded its estimate of a 30% to 50% increase.
"While we believe the general steel price trend in 2008 will be flat to moderately rising, steel producers who lack self-sufficiency in the key steel-making raw materials may face margin compression with lower year-on-year profitability," Peter Archbold, a Fitch director, said in a written statement.
Producers with material raw material self-sufficiency are expected to fare better and include ArcelorMittal (BBB/F2/positive) as well as Severstal (BB-/B/positive), Evraz (BB/B/stable) and NLMK (BB+/B/stable).
Posco is likely to face margin pressure but can pass along much of the cost increase to their customers as demand is still strong, especially from automobile manufacturers.
In China, companies concentrating on higher-value steel products such as Baosteel (BBB+/F2/stable) or with better raw material access like Angang (BBB-/F3/positive) are expected to better withstand the cost increase, according to the agency.
The rising iron ore price also could hasten the closure of excess low quality steel-making capacity, ultimately improving the demand-supply balance within the Chinese market, Fitch noted.
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