Published: Tuesday July 10, 2012 MYT 11:13:00 AM
Moody's sees Asian steelmakers' profitability to remain low
KUALA LUMPUR: Asian steelmakers' profitability will remain low by historical standards, weighed down by oversupply, China's moderating growth rate and still elevated input costs, according to Moody's Investors Service.
In its report issued on Tuesday, the ratings agency said while prices for iron ore and coking coal have fallen since end-2011 as a result of the slowdown in the global economy and steel demand, they would remain elevated relative to their historical levels because of tightness in supply.
"Also, China's supply glut and increased exports will cap price hikes elsewhere and prohibit a swift and sustained recovery in profitability to historical levels," according to Moody's analyst Jiming Zou.
Moody's had released a report entitled, "Asia steel industry outlook: Slow growth but modest improvement in profit ahead after recent trough".
Overall, the outlook for the Asian steel industry was stable, and reflected the slowdown in growth and the expected modest increase in the profitability of regional steelmakers.
"China's still-positive, albeit declining, purchasing managers' index (PMI), combined with the country's slowing economic growth and reduced demand from Europe, suggests that growth in regional demand for steel will decrease to an average rate of 4%-5% year-on-year for 2012, from more than 8% in 2011," said Zou.
"On the other hand, lower input costs over the last few months and an expected mild recovery in demand in the next 12 months will lead to a modest improvement in steelmakers' profits, as measured by EBITDA per tonne," he adds.
Zou said China's supply glut and increased exports would cap price hikes elsewhere and prohibit a swift and sustained recovery in profitability to historical levels.
Among Moody's-rated Asian steelmakers, the profitability of Tata Steel (Ba3 stable) was most vulnerable to a greater-than-expected downturn in Europe, while China Oriental (Ba2 stable) and Baosteel (A3 stable) would be most affected by a further slowdown in China.
For South Korea, Moody's expected growth in steel consumption to slow to low-single-digits in 2012 from 7.6% a year earlier, as machinery and equipment demand from China and demand for ship plates will be sluggish.
"However, a rebound in long-steel demand -- as well as the recovery in housing supply and strong automobile exports -- will mitigate this negative impact," said the report.
Moody's expected Japan's steel demand to be steady this year, despite the appreciation of the yen against the US dollar, because of the reconstruction after the March 2011 earthquake and tsunami.
For India, growth in steel demand would also slow for all of 2012 as the country's GDP growth is likely to decrease.