Weak profitability to hit Asian steelmakers’ earnings, says Moody’s

By Anil Mathews (ScrapMonster Author)

August 17, 2016 11:47:05 PM

NEW DELHI (Scrap Monster): Moody’s, in a newly released research report on Asian steel industry, has stated that earnings of Asian steelmakers are likely to contract due to declining production volume and weak profitability. The agency continues to maintain a negative outlook on the Asian steelmaking industry. However, Indian steel industry is expected to perform better than Asian peers, on account of recent safeguard and protectionist measures implemented by the Indian administration.

According to Jiming Zou, Vice President and Senior Analyst, Moody’s Investor Service, Asian steelmakers’ aggregate earnings are likely to remain lower in the next twelve-month period. The steel demand from China is likely to decline further. The steel trade protectionism from increasing number of world countries is likely to limit exports. The Chinese steel production is expected to remain subdued on account of declining domestic demand and drop in exports. This in turn may affect the profitability of steel sector companies.

Industry consolidation may lead to closure of loss-making and inefficient steel making facilities in China. Moody’s forecasts 3%-4% decline in Chinese steel production during the next one-year period. However, the reduction in steel output is likely to have limited impact, given the anticipated drop in demand and extensive overcapacity in China. The rising demand from India and Southeast Asia will not be sufficient to offset the demand drop in China. Incidentally, China accounts for 70% of the Asian steel consumption. The report also foresees lower profitability for Chinese steel firms in comparison with Asian peers.

Despite trade cases by various countries, Chinese steel exports clocked 9.3% year-on-year growth in steel exports during the initial six-month period of the year. It must be noted that the exports to North America, the EU region and Latin America have declined drastically by nearly 36% in the first half of the year, due to harsh tariff imposed on imports of Chinese steel. On the other hand, exports to other Asian countries and the Middle East surged higher. Exports to Vietnam, Thailand, Saudi Arabia and Indonesia reported strong growth in the absence of trade restrictions.

The export restrictions are likely to impact Korean and Japanese steel makers. The trade restrictions, declining demand from China and falling domestic demand have led to reduced production by steel firms in both the countries. The stronger yen will continue to squeeze the profitability of Japanese steel exporters.

The Indian steel companies are expected to perform better on increased domestic demand. The outperformance on Indian steel makers in comparison with Asian peers is also due to protection measures announced by the Indian administration including Minimum Import Price (MIP) and anti-dumping duties. The protection measures by India will hurt Chinese steel producers as well steelmakers in other regional steel making countries such as Japan and South Korea.

The Moody’s report titled ‘Steel –Asia: Lower Earnings Keep Outlook Negative’ states that steel demand growth in India will be driven by increased urbanization and rising demand from infrastructure and manufacturing sector. The steel demand in the country will outpace the regional average, it says. The profitability of rated steel producers such as Tata Steel and JSW Steel is expected to remain higher than regional industry average. The report predicts increased earnings for Tata Steel on account of ramp-up of Kalinganagar operations. Similarly, JSW Steel’s brownfield expansion will lead to better earnings growth in 2016.