Moody's: Slowing Chinese demand will increase operating challenges for Asian steel companies

Moody's Investors Service says that Asian steel companies face increasing operating challenges in 2015, as Chinese steel demand slows. Moody's could change its outlook on the Asian steel sector to negative from stable if this weakness persists.

Moody's last changed its outlook to stable from negative in August 2014.

"The weakness in the recent indicators, such as China's Purchasing Managers' Index (PMI) and steel prices, imply a contraction in steel margins from a strong H2 2014," says Zou. "Steel demand growth in China will be negatively affected by the slowing domestic economy and weakness in the property market, which is one of the primary end-markets for steel."

The sluggish steel demand will impact steelmakers in Asia because China accounts for approximately 70% of the region's steel demand.

Moody's maintains a stable outlook for the Asian steel industry for now, given its expectation that steelmaker profitability will remain better in the first half of 2015, compared to the weak margins seen in the first half of 2014.

But Moody's could change its outlook on the Asian steel sector to negative if steel demand continues to decline over the next few months. Still, sluggish domestic demand won't greatly affect supply levels, says Moody's, as Chinese steel companies will keep 2015 production close to 2014 levels by boosting higher-price exports, although this will pressure regional steel prices.

Regionally, Moody's expects flat demand in Korea and Japan, while India will post single-digit demand growth as the new government invigorates infrastructure spending. Indian steel companiesbecause of import duty and/or captive iron ore supplieswill enjoy the highest profitability among the cohort, notes Moody's.

Elsewhere in the region, Moody's expects Japanese steel companies to benefit from the weak yen, which boosts their competitive cost structures.

Moody's would change its stable outlook to negative if manufacturing activity in China continues to decline, as indicated by China's PMI remaining below 50 in the next two to three months, and if Moody's expects thatfor the major steelmakers over the next 12 monthsEBITDA per tonne declines more than 15% on a year-on-year basis. The PMI fell to 49.8 in January, indicating a contraction in manufacturing activities.

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