Moody's changes outlook for Asian steel industry to negative
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Asia's steel industry shows a negative outlook, said Moody's Investors Service, as manufacturers, distributors and customers are likely to reduce their stocks.
"The negative outlook reflects our expectation that Asian steel manufacturers will report historically low profits over the next 12 months, as demand for steel is expected to weaken in the second half of this year, owing to destocking and slower economic growth; particularly in China," said Jiming Zou, a Moody's Assistant Vice President and Analyst.
"Manufacturers, distributors and customers will reduce their stocks because of weak demand and excess steel supply in the Asian market; a move that will put further pressure on the overall profits of steelmakers," added Zou.
Zou was speaking on a just-released Moody's report titled, "Destocking, Weak Demand and Excess Supply Depress Steel Manufacturers' Profits."
Moody's estimates in its report that demand in Asia will increase only by around 2-3 per cent in the 12 months to June 2014, significantly lower than the 16 per cent compound annual growth rate between 2000 and 2010, because of the Chinese government's shift in emphasis from infrastructure spending to consumption and the country's slower GDP growth.
As Moody's report points out, data from the World Steel Association (WSA) shows that China accounts for over 70% of Asia's consumption and production of steel.
Figures from the China Iron and Steel Association show that total inventory levels held by China's major steelmakers remain at historically high levels.
Moreover, according to the WSA, China's monthly steel production decreased to 64.7 million tonnes in June from its record high of 67 million tonnes in May.
"Even if inefficient Chinese steelmakers lower production levels in the second half of this year to stem the losses they are facing, the reductions will not be enough to improve the supply and demand imbalances for steel," said Zou.
"In addition, the supply-demand situation will worsen if China's GDP growth falls."
Moody's report further explains that Asian steelmakers will not benefit from the lower prices of iron ore and coking coal -- the two main raw materials used in producing steel -- because steel prices will also fall owing to the weak bargaining power of the manufacturers against their customers.
Nonetheless, Japanese steelmakers are better positioned than their Asian peers to maintain or increase their profitability slightly, because of the depreciating yen and the improving domestic economy.
According to Moody's report, while Chinese steel mills will continue to sell products at close to or below breakeven cost, making them the least profitable of all their Asian peers, the profits of Indian steel manufacturers are helped by their management of input costs through their ownership of iron ore mines.
