Recovery for the steel industry is expected to be very slow in 2010, ratings agency Moody's said on Tuesday.

"In terms of performance of key economic indicators such as industrial production, residential construction and non-residential construction ? all important sectors for the steel and base metals companies ? recovery will be gradual," the company said in a report on the steel, mining and coal industry.

Moody's vice president ? senior credit officer Carol Cowan said the sector's recovery would not be evenly balanced among the global economies with much more rapid growth resumption being witnessed in China and certain Asian economies like India, while the US and Europe will be much slower to come back to sustainable recovery.

"We continue to maintain a negative outlook for the US steel industry, as the industry faces a long road back and we have yet to see anything that materially changes that view," said Cowan.

Very difficult start

According to the report, the first quarter would continue to be very difficult with some evidence of a more sustainable improvement in operating conditions expected only towards the second half of 2010.

"What we are still looking to see is whether or not some of the strengthening perceived at the end of 2009 is sustainable. Is it real demand that will continue to be evidenced on order entry levels over the next several months, or is it still merely restocking of the distribution channels, which have been pushed extremely low as everyone looked to manage down inventory in 2009," Cowan asked.

While capacity utilization rates have certainly improved from a low of 33 percent reached in January 2009 up to around 65 percent at this time, they still continue to fluctuate in the low 60 percent to 65 percent arena and do not, as yet, suggest that the industry is seeing a sustainable recovery.

Prices have risen over the last few weeks and while some of that is reflective of improved demand, it is also reflective of increases in input costs, particularly scrap, as well as expectations that iron ore prices will rise for 2010 contracts.

As a consequence, price increases are not seen as falling fully to the bottom line and improved volumes, improved mix and improved pricing are needed to get the industry back to a more robust earnings and cash flow generation position.

Better then nothing

"We anticipate that private, non-residential construction will again decline in 2010 ? by approximately 9 percent -- and that US light vehicle sales will be at about 11.5 million units. Those levels remain well below 13.2 million seen in earlier years and therefore, will have implications for the steel industry," Cowan said.

However, she said anything is better than nothing given the depths to which volumes fell in the automotive industry in the early part of 2009.

Looking ahead, she said she did not expect the industry to suffer from higher imports in 2010 ? something that is always remains a risk for the industry.

She said there is clearly overcapacity on a global level and if China continued to expand its production at the levels it has been doing in recent years, all that steel will have to find a home.

Behaviour patterns in key end markets, utilization rates and service centre inventories remain important areas of focus, Cowan said.

With companies having taken action to reduce costs, there will be a focus on liquidity and cash flow in 2009.

Bigger picture

"They did take costs out of the system but we will continue to evaluate and monitor how sustainable some of these cost reductions are, particularly as volumes come up and business comes back," said Cowan.

Looking at the bigger picture, Cowan said industry consolidation in recent years had benefited the industry and there had been a fundamental and structural change in the industry, which should position it better to deal with its inherent cyclicality.

The degree of the downturn in 2009 was unprecedented in recent history and the depths to which the industry fell will take time to recover from.

That said, the discipline that the producers evidenced and their continued efforts to try and balance production levels to declining demand levels has certainly helped the industry come through this, to the point where they are today, better than they would have been in the 2000 to 2003 timeframe.

"Given our outlook for some of the key industries, this will be a slow road back in 2010. Capital investments will continue to be an area of focus, as will the ability to invest in the business. Essentially, the industry needs to get back to operating at a minimum average capacity utilization for the year of between 60 percent to 70 percent, with hot rolled prices in the $500 to $600 per ton range, taking into account some of the recent cost increases.

Stable outlook?

For a robust recovery, capacity utilization will need to run in the 80 percent-plus range, which could be difficult to accomplish in 2010," Cowan said.

She noted that there were a number of developments, however, that could lead to a revised and stable outlook for the sector.

These include consistent increases in sustainable entry-order levels, consistent monthly capacity utilization rates averaging at least 65 percent, and improvement in the commercial construction and automotive markets which collectively account for over 50 percent of steel consumption.

"We do believe, however, that the outlook for this sector has about a 75 percent chance of going stable during the first half of 2010," she said.