RPT-Fitch: Tata Steel charge highlights industry's European troubles

Tue May 14, 2013 8:53am EDT

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May 14 (Reuters) - (The following statement was released by the rating agency)

Tata Steel's USD1.6bn write-down on its European operations highlights the weak medium-term growth prospects for all steel producers in the region and the difficulty producers have in adjusting to changes in demand, Fitch Ratings says.

Tata attributed the write-down to a prolonged fall in demand, which the company said was down nearly 8% in FY13 and almost 30% since 2007. For the sector as a whole, we expect growth in the major Western European markets to remain anaemic over the medium term, even as the eurozone recovers from its current weakness. Demand from emerging European markets will be stronger, driven by faster economic growth and higher investment.

The three largest steel-consuming sectors in Western Europe are construction, automotive and mechanical engineering. For 2013, we expect construction volumes to fall a further 5%-10%, while automotive demand is likely to fall marginally. Mechanical engineering has been a bright-spot due to emerging-market export orders, but growth started to slow in early 2012 and is likely to be marginal in 2013.

The weak demand outlook for European steel-makers has driven some producers to idle or retire higher-cost facilities. However, longer-term adjustments are typically slow and costly. The sector has high exit costs, given significant capital investment levels, high decommissioning costs and labour notice periods. Recently, steel producers have also faced increased government opposition to plans that would lead to large-scale job cuts.

We set out our assessment of the world's main steel producing markets and our expectations for the sector in the "Global Steel Handbook," published in March and available at www.fitchratings.com.

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