International credit rating agency Moody's has announced that Asian steel companies will see their overall earnings in the current year fall to levels even lower than the weak results reported in 2015 because production volumes and spreads will contract further, against the backdrop of oversupply and the resulting low prices.
According to Moody’s, as demand for steel in China declines further, against the backdrop of slower Chinese economic growth, the country's steel producers will continue to export their giant stockpiles of steel, pressuring prices in Asia. Antidumping measures and safeguard duties will slow Chinese export growth, but overall volumes will remain high. China accounts for half of all steel production globally, and three-quarters of such production in Asia. It is also a giant steel consumer. Consequently, Chinese steel supply and demand dynamics show significant effects beyond the country's borders.
In 2015, China's apparent steel consumption declined five percent year on year, while net exports grew 25.5 percent. Moody's expects that steel demand in China will fall another five percent in 2016 and exports will rise by a single-digit percentage. In terms of the Chinese market in particular, despite the government's efforts to consolidate the domestic steel industry, there is significant uncertainty over the pace of the capacity reduction and rebalancing of supply and demand in the country.
As for Korean and Japanese steel companies, they are better positioned to weather adverse market conditions because of their focus on premium products, although earnings will stay below their historical levels. In addition, for major Indian steel mills, the ramp-up of new steel-production capacity, resumption of captive iron ore production and the government's introduction of minimum import prices will help the sector mitigate earnings pressure during 2016.