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Friday, 27 June 2008

Worst of Credit Crisis Yet to Come

By Stewart Bailey and Dale Crofts

June 26 (Bloomberg) -- The global credit crisis will slow construction and U.S. economic growth for at least 18 more months, Nucor Corp. Chief Executive Officer Dan DiMicco said.

``We haven't seen the worst impact on the economy yet,'' the CEO of the largest U.S. steel producer said yesterday in an interview in New York. ``The impact of the tighter credit controls is just starting to affect folks.''

The credit crisis, sparked by U.S. mortgage defaults, caused $400 billion in writedowns at the world's largest banks and securities firms in the past year. Standard & Poor's and Moody's Investors Service have tightened credit-rating measures, making it more difficult for companies to borrow money, DiMicco said.

While the crisis originated in the U.S., it's a worldwide phenomenon that will last through 2009 at least, DiMicco said.

``After that, who knows?'' DiMicco said. ``There are two camps: one saying we're in a recession, the other saying we're getting close to a recession. You don't hear anyone saying we're heading toward a recovery.''

The Federal Reserve said yesterday that ``tight credit conditions'' will curb economic growth in the next few quarters. American Express Co. CEO Kenneth Chenault said credit indicators have deteriorated beyond the company's expectations.

Nucor, based in Charlotte, North Carolina, fell $2.79, or 3.6 percent, to $73.87 at 4:15 p.m. in New York Stock Exchange composite trading. The shares still have gained 25 percent this year.

Tightened Credit

S&P has downgraded 345 companies this year as of June 24, the majority in the U.S., Sudeep Kesh, an associate in S&P global fixed income research, said in a telephone interview from New York.

Nucor has already felt the credit crunch, even with an A1 rating from Moody's and an A+ from S&P, in both cases the fifth- highest rating. Credit-rating companies threatened to withdraw Nucor's investment-grade status earlier this year if the steelmaker borrowed all of the $3 billion it wanted to finance expansion and acquisitions, DiMicco said.

The prospect of a downgrade, which would have cost Nucor ``hundreds of millions of dollars,'' was enough to force it to borrow only $1 billion and to sell new shares for the first time in its history to raise the remainder, DiMicco said.

Turmoil in credit markets has meant that ``even credit- worthy borrowers like Nucor are having to jump through greater hoops,'' said Michelle Applebaum, who runs a steel-equities research firm in Highland Park, Illinois. ``The concept of Nucor being anything other than investment grade seems strange.''

Operating Costs

Tighter credit controls will raise operating costs for property developers and government agencies building bridges, roads, railways and industrial properties, DiMicco said. That is compounded by higher costs for steel and key raw materials such as iron ore and coal, he said.

Nucor produces 22 million tons of flat- and long-steel products a year from mills in states including Louisiana, Ohio and Texas.

``How are the states going to handle the highway work, and where is the federal government going to do anything about the infrastructure?'' DiMicco said. ``You need to be able to borrow more to do the same thing as before.''

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