Moody's upgrades Asia steel industry outlook to stable from negative

Operating conditions in India seen as the most supportive over robust demand, protectionist measures

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

"We expect profitability of our rated Asian steel companies – measured by Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne – to remain stable in the next 12 months, following a significant improvement that began in the second half of 2016," said Chris Park, an associate managing director.

The removal of excess steel production capacity in China and the broadly steady steel demand in the region will be the main drivers of this profitability, explained Park.

A stable outlook also reflects the state of China's Purchasing Managers' Index (PMI), which remains above 50, indicating a slight increase in manufacturing activity in China, the world's biggest steel market, said the ratings 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 a 2.3 per cent growth in apparent demand (production less net exports) and a higher-than-expected reduction in production capacity. Moody's notes that China's capacity will continue declining because the government's supply-side reforms and environmental protection measures are forcing inefficient mills to close and major producers to merge.

Asian steel demand will also remain stable with robust growth 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 around 2.5 per cent this year and be flat in 2018, said the release.

Contracted sales in China's property sector are expected to see a slowdown over the next 12 months because the government has tightened policies since September 2016 but the effect on steel demand will be fairly modest. 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. On the other hand, Chinese steelmakers' profitability will decline slightly in 2017 following a strong second half in 2016.