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This is 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, it said.
The rating agency changed its outlook for Asia’s steel industry to negative from stable in a report published last week.
“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,” Jiming Zou, a Moody’s assistant vp and analyst, said in the report.
Demand in Asia will rise only by around 2-3% in the 12 months to June 2014, significantly lower than the 16% compound annual growth rate between 2000 and 2010, because of the Chinese government’s shift in emphasis from infrastructure spending to consumption along with the country’s slower GDP growth, Moody’s said.
China accounts for over 70% of Asia’s consumption and production of steel, according to data from the World Steel Assn (WSA).
Figures from the China Iron & Steel Assn showed 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 fell 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,” Zou said.
In addition, the supply-demand situation will worsen if China’s GDP growth falls, he added.
Besides profitability, the outlook for Asia’s steel industry is also determined by monitoring China’s Purchasing Managers’ Index (PMI), Moody’s said. It pointed out that the PMI fell to 50.3 last month from 50.8 in May.
Although the reading in July was up slightly from June’s 50.1, the lowest level in the past nine months, China’s PMI remained weaker than at the beginning of the year. The low reading indicates very limited expansion in the country’s manufacturing sector.
Moody’s further said that Asian steelmakers will not benefit from the lower prices of iron ore and coking coal 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.
By contrast, the profits of Korean steelmakers will fall due to a worsening supply-demand imbalance following capacity expansions by major domestic players, as well as a likely appreciation of the Korean Won against the Japanese yen and Chinese yuan, and the weak demand from Korea’s shipbuilding sector, one of the key end-users of domestically produced steel.
According to Moody’s, while Chinese steel mills will continue to sell products at close to or below break-even 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.
The industry outlook could be changed back to stable if China’s PMI improves and stays above 50, and if the earnings before interest, taxes, depreciation and amortisation per tonne for the region’s largest steelmakers do not deteriorate during the outlook period, Moody’s concluded.