Moody's: Negative outlook for Asian steel industry reflects weak profitability amid oversupply

Moody's Investors Service says that its negative outlook for Asian steel companies reflects its expectation that profitability for the steelmakers will continue to decline, as oversupply and weakening demand in China (Aa3 stable) will further weaken prices.

"Slow property investment, modest infrastructure spending and lackluster manufacturing will reduce Chinese steel demand by about 5% in 2016," says Jiming Zou, a Moody's Vice President and Senior Analyst.

"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," adds Zou.

Moody's further notes 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 will continue to 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.

Moody's outlook could revert to stable if (1) it expects EBITDA per tonne for major Asian steelmakers to stabilize over the next 12 months; and (2) China's Purchasing Managers' Index (PMI) stays above 50, indicating manufacturing growth, in turn boosting demand for the region.

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