Costs the key for Europe steel outlook-Fitch

Thu Mar 31, 2011 3:45pm GMT

* Non-integrated steel makers face higher raw material costs
* Auto, engineering demand healthy, construction weaker
* Fitch sees European steel demand up 5-6 pct in 2011

PARIS, March 31 (Reuters) - The performance of European steel makers this year will be shaped by their ability to pass on higher raw material costs and by contrasting growth in the industries they supply, a Fitch analyst said on Thursday.

"Possibly the biggest issue for steel producers this year is their ability to pass through costs," Peter Archbold, European head of basic materials at Fitch Ratings, told reporters.

The price of most mining commodities was expected to be higher on average this year because of supply tensions, with coking coal expected to be the most bullish following floods in Queensland, Australia, that have cut output, he said.

"There is going to be some margin pressure for non-integrated companies," he said, stressing that steel demand was not as strong as in 2006-08 when producers were in a better position to pass on rising raw material costs.

However, conditions for steel makers would also depend on demand from different industries, he said, noting that while Thyssenkrupp (TKAG.F: Quote) did not have integrated mining activities it was benefiting from brisk demand from the German car industry, one of Thyseenkrupp's main outlets.

Fitch expected steel demand from the automotive sector in Europe to rise by 5-6 percent this year, in line with its outlook for overall growth in European steel demand.

Demand growth would be faster in mechanical engineering, a key sector in Germany, at 7-8 percent but much weaker in construction at 1-2 percent, he said.

Fitch sees 2011 global steel demand rising by 6-10 percent.

The European steel sector as a whole was expected to continue this year its "progressive recovery", which has seen output climb back up to 80 percent of 2007 levels, lagging the global market which has already reached pre-crisis levels, driven by Chinese production, Archbold said.

The pushing through of production costs should support steel prices in Europe, he added.
(Reporting by Gus Trompiz, sourced :Reuters)