Steel Industry Outlook Turns Negative

Saying that demand will be soft and prices will be low, Moody’s today changed its outlook for the U.S. steel industry to ‘negative’, indicating that conditions in the steel business will get worse over the next 12 to 18 months.

The ratings agency does not specify individual companies, but it’s no secret that U.S. steelmakers like United States Steel Corp. (NYSE: X), AK Steel Holding Corp. (NYSE: AKS), Nucor Corp. (NYSE: NUE), and Steel Dynamics Inc. (NASDAQ: STLD) have fallen on hard times since the beginning of the year.

Moody’s also cites imports as a continuing risk to demand for U.S. steel. In the first eight months of the year, steel imports to the U.S. have risen by 18% year-over-year. Steelmaker Schnitzer Steel Industries Inc. (NASDAQ: SCHN) fired 300 workers a month ago citing rising inventory costs as the main cause of the decision.

Moody’s said that it could raise the industry’s rating back to ‘stable’ under certain conditions:

[I]f the PMI index were to move above 50 for at least two consecutive months and capacity utilization consistently tracked between 75%-80% … A steady PMI reading above 55 and expectations for sustained capacity utilization above 80% could lead to a positive outlook.

Capacity utilization is now above 70%, growth peaked in April and has been slowing ever since. The August PMI reading was 49.6 has been contracting for three consecutive months. A return to a more generous outlook for the steel industry appears doubtful for the near future.

Paul Ausick