The outlook for Asian steel producers — Australia’s biggest market for the country’s leading export, iron ore, as well as for metallurgical coal — is forecast to improve over the next year.
Moody’s has upgraded its forecast for the sector’s profitability from negative to stable, following a significant improvement in performance starting late in 2016 and continuing this year.
This includes steel giants such as China’s Baowu, South Korea’s Posco and Japan’s Nippon Steel.
Chris Park, an associate managing director of the ratings agency, said today: “The removal of excess steel-production capacity in China and broadly steady steel demand in the region will be the main drivers of this profitability.”
The stable outlook, he said, also reflects the state of China’s Purchasing Managers’ Index, which remains above 50, indicating a slight increase in manufacturing activity in China, the world’s biggest steel market.
The Asian steel industry’s profitability has improved, Moody’s said, since bottoming out in 2015, thanks to a recovery in industry fundamentals in China, with apparent demand — production less net exports — growing 2.3 per cent in 2016, as well as production capacity being cut by more than expected.
Inefficient mills are being forced to close in China, the agency said, and major producers are being required to merge — causing output capacity to keep falling over the year ahead.
Moody’s also attributed some of the capacity reduction to environmental measures.
But at a meeting last week cited by analysts at China Policy, the China Iron and Steel Industry Association said that these measures were prompting temporary, not permanent, production suspension since, it claimed, the majority of CISA members could meet the new required emission level standards.
The association also denied that the supply of steel products would see a severe reduction in the second half of 2017.
But David Qu at ANZ Research believes that, nevertheless, the capacity reduction will proceed, noting that partly as a result steel prices have continued to rise this month.
And on the demand side, he said, “the strong pipeline of infrastructure investment will continue to underpin material prices in the coming months.”
Steel demand growth is also expected to remain robust, said Moody’s, in South and South-East Asia.
Source: The Australian