Moody's Investors Service has changed its outlook for the Asian steel industry to negative from stable, reflecting steelmakers' declining profitability amid a growing supply glut.
"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," the agency quoted Jiming Zou, a Moody's Vice President --Senior Analyst as saying.
The outlook on the industry had been stable since August 2014. As China, which accounts for 70 percent 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, said the agency. In the first four months of 2015, Chinese apparent steel demand, as measured by total output less net exports, declined by 4 percent as against a 2.5 percent drop in entire 2014, rating agency said.
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. As steel prices have fallen more than iron ore prices this year, it implies that there is a decline in steelmakers' profitability.
However, there continue to be varied business fundamentals across the region as some Indian steel companies such as Tata Steel delivering the highest profitability levels owing to captive iron ore supplies and rising domestic demand.
Japanese steel companies such as Nippon Steel & Sumitomo Metal Corporation and JFE Holdings will continue to benefit from the weak yen, despite slightly weaker demand in the country.
Moody's said it 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, the agency added.