Moody’s upgrades Asian steel industry’s outlook to stable

Moody’s Investors Service has revised the outlook for the Asian steel industry to stable from negative on expectation that profitability will remain steady.

“We expect profitability of our rated Asian steel companies — measured by Ebitda per tonne — to remain stable during the coming 12 months following a significant improvement that began in the second half of 2016,” Chris Park, associate managing director at the rating agency, was quoted as saying in a statement on Thursday. Ebitda is earnings before interest, tax, depreciation and amortisation. The removal of excess steel-production capacity in China and broadly steady steel demand in the region will be the main drivers of this profitability, said Park.

Stable outlook also reflects the state of China’s Purchasing Managers’ Index, which remains above 50, indicating a slight increase in manufacturing activity in China, the world’s biggest steel market, according to the agency.

The Asian steel industry’s profitability has increased since bottoming out in 2015, and the improvement in 2016 was led mainly by a recovery in industry fundamentals in China, resulting from 2.3 per cent growth in apparent demand (production less net exports) and a higher-thanexpected reduction in production capacity.

Moody’s notes that China’s capacity will continue to decline because the government’s supply-side reforms and environmental protection measures are forcing inefficient mills to close down and major producers to merge.

Asian steel demand will also remain stable with demand growth robust in South and Southeast Asia alongside GDP growth, and stable demand in China. “We expect China’s apparent steel demand (production less net exports) to increase about 2.5 per cent this year and be flat in 2018,” said the statement.

Contracted sales in China’s property sector will likely slow over the next 12 months because the government has tightened policies since September 2016, but the effect on steel demand will be fairly modest over the next 6-12 months. This is because the strong contracted sales evident since 2016 will support robust growth in new construction starts and steel demand over the next several quarters.

Among major steel-producing Asian countries, operating conditions in India will be the most supportive owing to robust domestic demand and protectionist measures. Regarding Japan and Korea, domestic demand will stay steady, which, along with steelmakers’ moves to cut costs and boost production of premium products, should keep their profitability stable or slightly higher.