Moody's sees profitability of Asian steel companies continue to fall in 2016

Profitability of Indian steelmakers will remain higher than that of other Asian steelmakers, owing to country's rising demand and captive iron ore mines

Moody's Investors Service has kept negative outlook for Asian steel companies as it expects fall in profitability for the steelmakers to continue, with oversupply and weakening demand in China further weakening prices of the commodity.

"Slow property investment, modest infrastructure spending and lackluster manufacturing will reduce Chinese steel demand by about 5% in 2016," the report quoted Jiming Zou, a Moody's vice president and senior analyst as saying. 

"At the same time, declining Chinese demand will lead to an increase in the Chinese steelmakers' exports, pressuring already low prices and thereby the profitability of the region's major steelmakers," Zou added.

The agency further noted that the lower raw material prices will be unable to offset steel price declines.

Moody's outlook is driven by China -- the region's largest consumer and producer of steel, whose economic slowdown and reforms mute the industry's demand-growth prospects. China's net exports surged to 12% of total domestic production in the first eight months of 2015 from 10% in 2014 and 6% in 2013, against the backdrop of declining domestic demand.

By region, Moody's expects Chinese steelmakers' EBITDA per tonne to continue fall in 2016, after declining considerably in 2015, as declining demand outpaces capacity reductions.

The profitability of Japanese and Korean steelmakers will remain pressured by sluggish domestic demand and steel price declines in overseas market.

However, for Japanese steelmakers, the weak yen supports producers' cost structure, partly mitigating the negative pressures. In the case of Korean steelmakers, a recovery in the domestic housing market will benefit long steel producers.

And although Indian steelmakers will also see their profitability fall in 2016, their profitability will remain higher than that of other Asian steelmakers, owing to the country's rising demand and captive iron ore mines.

Moody's further notes that the profitability for most of the steel companies it rates in Asia will exceed the regional average, because they are market leaders in their home countries, sell high-margin products, and benefit from business integration and diversification.