Moody's changes outlook for Asian steel producers to negative on weakening profitability

Rising input costs and inability to pass on higher costs to customers are pressuring the profitability of Asian steel producers, Moody's Investors Service said on Wednesday while revising its outlook for the sector to negative.

"We expect steel producers' profitability -- as measured by earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne -- will decline by around 15 per cent in the 12 months to June 2020, following an 8 per cent drop in the 12 months to June 2019," said Chris Park, an Associate Managing Director in Moody's Corporate Finance Group.

Prices of iron ore and coking coal, two key steelmaking inputs, have surged by more than 60 per cent and 20 per cent in the year to June 2019. They will likely stay high for some time, said Park in the report.

 

At the same time, weak demand in end-markets is limiting the ability of producers to pass on these prices increases to customers, resulting in narrowing product spreads.

"Despite an uptick in demand from the infrastructure sector, soft demand from the property and manufacturing industries will limit growth in steel demand in China, while demand in South Korea and Japan will remain largely flat," added Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer, and co-author of the report.

"India's steel demand will remain the strongest in Asia but slow to mid-single-digit growth, as weak auto and manufacturing demand offsets demand growth in the infrastructure and construction industries," said Chaubal.

Meanwhile, limited new capacity additions across the region will curb a sharp decline in steel prices with production up only in India, where demand is still growing, and flat in China, South Korea and Japan.

Finally, Moody's expects the increase in US tariffs on steel imports will have a limited direct impact on Asian steel companies because of their modest US sales. The worsening Japan-South Korea relations will also not have a material impact on both South Korean and Japanese steelmakers.

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