JAKARTA — Moody’s Investors Service says that declining Asian production — spurred by continued slowing demand from China and increasing trade frictions worldwide — and weak profitability will reduce the earnings of Asia’s steelmakers.
“Our expectation that Asian steelmakers’ aggregate earnings will be lower in the coming 12 months keeps the industry outlook negative,” says Jiming Zou, a Moody’s Vice President and Senior Analyst.
“A continued decline in demand, driven by China, and increasing trade barriers around the world, which limit exports, will reduce steel production, and persistent overcapacity will keep prices and companies’ profitability low,” adds Zou.
Moody’s conclusions were contained in a newly released report on the Asian steel industry, “Steel - Asia: Lower Earnings Keep Outlook Negative”.
Moody’s expects Asian steel demand will continue to decline by a low-single-digit percentage in the next 12 months, owing mainly to slowing demand from China’s manufacturing and property sectors.
Demand from India and Southeast Asia will increase, but will be insufficient to offset the decline in China, which accounts for about 70% of Asian steel consumption. Chinese production will likely contract 3-4 percent in the next 12 months
Some loss-making small or inefficient steel companies in China have suspended production, and supply-side reform is driving industry consolidation. However, these supply reductions will have a limited impact in the next 12-18 months, given the declining demand and substantial overcapacity in China.
The business fundamentals for steel makers vary across the region, with Chinese profitability remaining lower than that of regional peers.
Moody’s expects earnings for steel producers in China to decline during the outlook period, after rebounding in the second quarter of 2016 because of temporary price spikes.
Korean and Japanese steelmakers will also be hurt by export restrictions, and Japanese companies will continue to suffer because of the strong yen. However, the profitability of Indian steel companies will outperform that of their regional peers owing to rising domestic demand, minimum import prices and anti- dumping duties.
Moody’s would consider changing the industry outlook to stable if we expect China’s Purchasing Managers’ Index to stay above 50, indicating expansionary manufacturing activity, and the EBITDA per tonne of major Asian steelmakers to show signs of improvement in the next 12 months. Both factors would stabilize steelmakers’ earnings.
However, a change to a positive outlook is unlikely during the coming 12 months in view of the current environment. The outlook has been negative since July 2015. (*)