Increasing demand, higher steel prices and improved profitability will underpin the continued stable outlook for the European steel industry into 2018, according to a leading ratings agency.

In a recent report for its clients, Moody's said European steelmakers were likely to see a boost in profits in 2018 as demand growth, stable raw material prices and anti-dumping duties look set to support higher steel prices for the next 12-18 months.

The supportive operating environment should translate into higher average steel spreads in 2018 compared with 2016, although at slightly lower levels than in 2017 as Moody's assumes a "moderation in European steel demand next year compared to 2017."

Average capacity utilisation rates at European steel mills should remain below 85%, which is within Moody's range for a stable sector outlook.

"Structural overcapacity and rising imports from countries not subject to EU anti-dumping tariffs, like South Korea, Turkey and India, remain constraining factors," the agency noted.

According to trade body Eurofer, imports rose by 5% in the 12 months to May 2017, although the growth rate was slower than the 10% recorded in 2016. In addition, merger and acquisition (M&A) activity in the sector is unlikely to translate into immediate reductions in the industry's overcapacity.

ArcelorMittal's (rated Ba1 stable by Moody's) acquisition of Ilva (unrated) aims to increase steel production in southern Europe rather than rationalise production. Similarly, Thyssenkrupp's (Ba2 developing) planned joint venture with Tata Steel (Ba3 negative) may only consider consolidating production after 2020.

Potential protectionist US trade policies could also pose a threat to Europe's steelmakers, Moody's said.

"Import restrictions could create ripples, currently difficult to quantify but potentially large, in the global market likely to weaken the European steel sector, especially if they lead to increased imports into Europe from countries which would have targeted the US market instead," the agency said.

Gianmarco Migliavacca, senior credit officer at Moody's, said maintaining the agency 'stable' outlook on the European steel sector stable reflects the expectation that steel consumption will grow by around 1.5%-2% in 2017-18.

"That's on the back of improving economic prospects and demand growth from the automotive, construction and capital goods markets."