Hong Kong, July 10, 2012 -- Moody's Investors Service says the outlook for the Asian steel industry is stable, and reflects 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," says Jiming Zou, a Moody's Analyst.
"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 was speaking at the release of a new Moody's report titled, "Asia Steel Industry Outlook: Slow Growth but Modest Improvement in Profit Ahead after Recent Trough."
According to the report, the profitability of Asian steelmakers will remain low by historical standards, given the oversupply in the industry, China's moderating rate of growth, and still elevated input costs.
While the 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 will 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," Zou says.
Among Moody's-rated Asian steelmakers, the profitability of Tata Steel (Ba3 stable) is most vulnerable to a greater-than-expected downturn in Europe, while China Oriental (Ba2 stable) and Baosteel (A3 stable) will be most affected by a further slowdown in China.
For Korea, Moody's expects 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.
Japan's steel demand will 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 will also slow for all of 2012 as the country's GDP growth is likely to decrease.
Moody's industry outlooks reflect the rating agency's expectations for fundamental business conditions in the industry over the next 12 to 18 months.
Moody's tracks two key indicators in assigning the industry's regional outlook: China's manufacturing PMI and projected EBITDA per tonne of major steelmakers in Asia.
If the PMI falls below 52 for two or more consecutive months and projected EBITDA per tonne drops more than 15% year-on-year, the outlook could change to negative. A projected increase of at least 15% in EBITDA per tonne could prompt Moody's to change the outlook for the sector to positive.
Moody's research subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143552.
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