Asian steel firms get negative outlook from Moody's on weaker profitability

Cites rising input costs, inability to pass on higher costs for revised outlook; India's steel demand to remain strongest in region, but auto and manufacturing sector demand could drag

Moody's Investors Service has revised its outlook for Asian steel sector to negative. In its report today, Moody's said rising input costs and an inability to pass on higher costs to customers is pressuring the profitability of Asian steel producers.

"We expect steel producers' profitability—as measured by EBITDA per tonne—will decline by around 15 per cent in the 12 months to June 2020, following an eight per cent drop in the 12 months to June 2019," Chris Park, associate managing director in Moody's Corporate Finance Group was quoted as saying.

Prices of iron ore and coking coal, two key steel-making inputs, have surged by more than 60 per cent and 20 percent respectively in the year to June 2019 and will likely stay high for some time. At the same time, weak demand in end-markets is limiting the ability of producers to pass on these prices increases to customers, resulting in narrowing product spreads, said the report.

"Despite an uptick in demand from the infrastructure sector, soft demand from property and manufacturing industries will limit growth in steel demand in China, while demand in Korea and Japan will remain largely 

flat," Kaustubh Chaubal, vice president and senior credit officer and co-author of the report was quoted as saying.

India's steel demand will remain the strongest in Asia but slow to mid-single-digit growth, as weak auto and manufacturing demand offsets demand growth in the infrastructure and construction industries, said 

Chaubal.

Meanwhile, limited new capacity additions across the region will curb a sharp decline in steel prices, with production up only in India, where demand is still growing, and flat in China, Korea and Japan.

Finally, Moody's expects the increase in US tariffs on steel imports will have a limited direct impact on Asian steel companies because of their modest US sales. The worsening Japan-Korea relations will also not have a material impact on both, Korean and Japanese steel makers.