The overall profitability of Asian steelmakers will stay strong in 2019 despite softening demand, Moody's Investors Service said Thursday.
In its latest report titled '2019 Asia Steel Outlook', Moody's said its outlook for the steel industry in Asia in 2019 was stable, based on assessment of broadly steady profitability for rated steel makers over the next 12 months.
"In the coming year, demand for steel in Asia is likely to stay at levels similar to that in 2018, indicating a softening from the robust growth seen in 2018," Kaustubh Chaubal, Moody's Vice President and Senior Credit Officer said.
As for profitability, rated Asian steel makers will see their profitability levels weaken mildly because of a decline in Chinese demand growth but stay strong overall, he said.
The strong profitability is underpinned by robust demand in south and southeast Asia, as well as China's capacity cuts and strict environment protection measures, Moody's said.
"Our forecast of flat steel demand in China for 2019 reflects higher infrastructure spending that will limit the negative effects of the ongoing Sino-US trade dispute, and slower growth in China's real-estate investments," Kai Hu, Moody's Senior Vice President said.
The escalation of the Sino-US trade dispute will have a limited effect on Asian steel demand, given the moderate indirect impact through supply chains and manageable direct macro impact, Moody's said.
However, the spillover effects could be greater, and potential US tariffs on imported vehicles pose key downside risks to Japanese and Korean steelmakers.
Moody's expects China's capacity cuts and stringent environment protection measures to mitigate weaker steel demand growth in the country.
The stable outlook also reflects China's Purchasing Managers' Index which remains above 50 indicating expansionary manufacturing activity despite declining in recent months. Business conditions and profitability will vary by company and the particular economy that steelmakers operate in, it said.
"With Japanese and Korean steel makers, the profitability of rated companies will diverge because of their different exposures to various end-markets. For Japanese companies, profitability will hold steady or improve slightly, but for Korean steel makers like POSCO (Baa1 stable) and Hyundai Steel Company (Baa2 stable), profitability will fall moderately in 2019," Moody's added.
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