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[ANALYST REPORT] Asian steel industry: Lower earnings keep outlook negative
By 박한나Published : Aug. 17, 2016 - 12:01
Declining production and weak profitability will reduce earnings. Our view that Asian steelmakers’ aggregate earnings will be lower in the next 12 months keeps the outlook negative.
A continued decline in demand, driven by China, and increasing trade barriers around the world, which limit exports, will reduce steel production. And persistent overcapacity will keep steel prices and companies’ average profitability low.
China drives demand weakness. We expect Asian steel demand will continue to decline by a low-single-digit percentage in the next 12 months owing mainly to slowing demand from China’s manufacturing and property sectors.
Indian and Southeast Asian demand will rise but won‘t offset the decline in China, which accounts for about 70% of Asian steel consumption.
Impact of reduced supply and consolidation will be limited. Some loss-making small or inefficient steel companies in China have suspended production, and supply-side reform there is driving industry consolidation. But these supply reductions will have limited impact in the next 12-18 months given the declining demand and substantial overcapacity in China.
Business fundamentals vary. Chinese steelmakers’ profitability will remain below regional peers’ given the declining domestic demand and increasing constraints on exports.
Korean and Japanese steelmakers will also be hurt by export restrictions, and Japanese companies such as Nippon Steel & Sumitomo Metal (Baa1 negative) and JFE Holdings ((P)Baa2 negative) will continue to suffer amid the strong yen.
The profitability of Indian steel companies such as Tata Steel (Ba3 negative) and JSW Steel (Ba3 negative) will outperform regional peers’ owing to rising domestic demand, minimum import prices and anti-dumping duties.
What would change the outlook. We would consider a stable outlook if we expect China’s Purchasing Managers’ Index to stay above 50, indicating expansionary manufacturing activity, and the EBITDA per tonne of major Asian steelmakers to show signs of improvement in the next 12 months.
Both factors would stabilize steelmakers’ earnings. A positive outlook is unlikely in the coming 12 months. The outlook has been negative since July 2015.
Source: Moody‘s Investors Service
A continued decline in demand, driven by China, and increasing trade barriers around the world, which limit exports, will reduce steel production. And persistent overcapacity will keep steel prices and companies’ average profitability low.
China drives demand weakness. We expect Asian steel demand will continue to decline by a low-single-digit percentage in the next 12 months owing mainly to slowing demand from China’s manufacturing and property sectors.
Indian and Southeast Asian demand will rise but won‘t offset the decline in China, which accounts for about 70% of Asian steel consumption.
Impact of reduced supply and consolidation will be limited. Some loss-making small or inefficient steel companies in China have suspended production, and supply-side reform there is driving industry consolidation. But these supply reductions will have limited impact in the next 12-18 months given the declining demand and substantial overcapacity in China.
Business fundamentals vary. Chinese steelmakers’ profitability will remain below regional peers’ given the declining domestic demand and increasing constraints on exports.
Korean and Japanese steelmakers will also be hurt by export restrictions, and Japanese companies such as Nippon Steel & Sumitomo Metal (Baa1 negative) and JFE Holdings ((P)Baa2 negative) will continue to suffer amid the strong yen.
The profitability of Indian steel companies such as Tata Steel (Ba3 negative) and JSW Steel (Ba3 negative) will outperform regional peers’ owing to rising domestic demand, minimum import prices and anti-dumping duties.
What would change the outlook. We would consider a stable outlook if we expect China’s Purchasing Managers’ Index to stay above 50, indicating expansionary manufacturing activity, and the EBITDA per tonne of major Asian steelmakers to show signs of improvement in the next 12 months.
Both factors would stabilize steelmakers’ earnings. A positive outlook is unlikely in the coming 12 months. The outlook has been negative since July 2015.
Source: Moody‘s Investors Service
