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Moody’s upgrades outlook for Asian steel industry

Moody’s has adjusted its outlook for the Asian steel industry to “stable” from “negative,” reflecting its positive expectations for the industry over the next 12 months, the ratings agency said yesterday.

The agency said it would consider changing the outlook to “positive” if the average profitability of major Asian steelmakers climbs 15 percent over the coming year.

“We believe the profitability of Asian steel manufacturers bottomed out early this year and will increase moderately year-on-year in the next 12 months,” Moody’s said in a statement. “The improvement will come as demand growth outpaces net capacity increases in China and drives higher utilization rates, and as raw material costs continue to decline.”

The agency’s remark came as steel mills in the region have gradually increased their production at a time when prices of major steel products have fallen 2 percent since the middle of last month, while iron ore prices remained relatively stable at about US$95 per tonne.

Industry experts say the trend is likely to continue through this quarter and the next, as the global steel supply remains relatively abundant compared with demand. However, they say Chinese government’s determination to rein in its market’s oversupply problem could be the wild card next year.

In the statement, Moody’s said China’s steel production capacity would likely be flat this year and the next, mainly due to the slower addition of new capacity by steel mills and Beijing’s bid to accelerate the weeding out of inefficient capacity and retirement of old mills.

“This will be the key driver of the expected increase in capacity utilization and profitability,” it said.

Based on the agency’s latest forecast, steel demand growth in China is set to slow to about 3 percent over the next 12 months from about 9 percent last year, in view of slowing economic growth and weakening momentum in fixed-asset investment and housing construction.

This slower level of demand growth would outpace the projected capacity growth in China over the next 12 months, Moody’s said. As a result, the rated steel firms under its coverage — including Baosteel Group Corp, Nippon & Sumitomo Metal Corp, JFE Holdings Inc, Hyuandai Steel Co and Tata Steel Ltd — would see their average EBITDA per tonne increase slightly over the coming 12 months, it added.

EBITDA stands for earnings before interest, tax, depreciation and amortization, which provides a better gauge of big-capex steel mills’ profitability.

Yet South Korean steelmaker POSCO’s profitability would still be flattish due to the strength of the won against the US dollar, which boosts the competitiveness of Chinese steel mills due to the yuan’s relative stability, Moody’s said.

Source – The Taipei Times

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