Fitch Ratings expects the global steel industry will see further consolidation in 2008 as producers seek to diversify geographically, rationalize production, and gain additional access to raw materials. The overall ratings outlook on the industry is stable.

Globally, strong consumption trends in developing nations are offsetting weakness in the United States. The stage is set for steel price increases in most markets in 2008 but tight raw materials markets are likely to cause margin compression for producers who don't control their sources of iron ore, coke, pig iron and scrap. Increased iron ore, coke and freight costs are expected to add $60-$70 per metric ton (mt) to costs of blast furnace steel without vertical integration.

While growth in global steel demand is expected to run about 6%-7% annually over the next 12-18 months, excess production could drag on pricing and further pressure tight raw material markets. Regional variations in pricing and profitability will re-emerge given high freight rates and protectionism.

Fitch expects steel prices to rise on average US$30-$50/mt, or half of what would be needed to pass through expected increased costs due to robust demand from emerging markets and supply discipline in China.

KEY 2008 THEMES/EVENTS:

BHP Billiton Ltd's efforts to acquire Rio Tinto plc could exacerbate tightness in the seaborne iron ore market and to a lesser extent in the metallurgical coal market where each company has strong market share and the merged company would have the leading share.

Fitch expects the U.S. economy to stay out of recession despite continued weakness in residential construction and emerging weakness in consumption. Further credit tightness that results in cutting non-residential construction or manufacturing expenditures would reduce U.S. demand for steel. Steel demand in the U.S. has been soft with prices currently supported by low shipments and low inventories as well as reduced imports.

The U.S. dollar may weaken with further interest rate cuts. Given the weak dollar coupled with high freight rates, the U.S. market will become fairly isolated. Europe, with the strong Euro will likely be the preferred destination for exports but even then freight rates may be a limiting factor.

Production in China has exceeded domestic demand since the end of last year, weighing on domestic pricing as well as pricing in Europe and the U.S. for some products for some periods of time. Increased domestic consumption in Russia has cut net exports there and the Middle East has been a robust market for exports resulting in fairly balanced markets overall. Continued excess production drives the raw materials costs up while weighing on pricing. Government measures in addition to cost pressures should result in closure of inefficient production capabilities and constrain the growth of China's net exports.