Moody's: Asian steel industry outlook negative on declining profits and growing supply glut

Moody's Investors Service has changed its outlook for the Asian steel industry to negative from stable on 13 July, reflecting steelmakers' declining profitability amid a growing supply glut. The outlook had been stable since August 2014, when it was changed from negative.

Moody's outlook reflects its expectations for fundamental business conditions in the industry over the next 12 months.

"We expect Chinese steelmakers' earnings will decline considerably in the coming 12 months as the country's steel glut worsens amid declining demand and steady capacity," says Jiming Zou, a Moody's Vice President -- Senior Analyst.

Zou was speaking on the release of a new Moody's report on the Asian steel industry, entitled " Steel -- Asia: Declining Profitability amid Worsening Supply Glut Drives Negative Outlook ".

As China (Aa3 stable)--which accounts for 70% of the region's steel demand--experiences weakening trends in real estate, infrastructure and manufacturing, Moody's expects steel demand to dwindle, even as production continues, pressuring steelmakers. Steel demand from Southeast Asia and India will likely increase but will be insufficient to offset the decline in China.

In the first four months of 2015, Chinese apparent steel demand, as measured by total output less net exports, declined by 4%, versus a 2.5% drop in full-year 2014, notes the rating agency.

On the other hand, steel production and capacity will remain stable as Chinese steel companies boost exports, especially given the price premiums for steel outside of China, says Moody's.

Additionally, the steeper decline in raw material prices than steel prices that improved the steelmakers' profitability in 2014 is unlikely to be repeated over the next 12 months. Evidencing this view, steel prices have fallen more than iron ore prices this year, implying a decline in steelmakers' profitability.

There continue to be varied business fundamentals across the region, with Indian steel companies such as Tata Steel Ltd. (Ba1 stable) and JSW Steel Limited (Ba1 stable) delivering the highest profitability levels owing to captive iron ore supplies (for Tata) and rising domestic demand.

Japanese steel companies such as Nippon Steel & Sumitomo Metal Corporation (A3 stable) and JFE Holdings, Inc. ((P)Baa1 stable) will continue to benefit from the weak yen, despite slightly weaker demand in the country. But Korean steelmakers' profits will be pressured.

Moody's could change its outlook back to stable if it expects that year-on-year growth in the EBITDA per tonne of major steelmakers will stabilize over the next 12 months and China's Purchasing Managers' Index stays above 50, indicating manufacturing growth. A change to a positive outlook is unlikely, however.