International credit ratings agency Moody’s changed the outlook for Asian steelmakers to negative due to higher input costs and Asian steel producers’ weakening profitability driven by the inability to pass on higher costs to customers.
Associate Managing Director in Moody’s Corporate Finance Group Chris Park stated: “We expect steel producers' profitability, as measured by EBITDA per ton, will decline by around 15 percent in the 12 months to June 2020, following an eight percent drop in the 12 months to June 2019.”
According to Moody’s, iron ore prices have increased by more than 60 percent year on year in the first half and coking coal prices by more than 20 percent year on year, which are the two key raw materials for steelmaking, and they are expected to stay high for the coming period. Furthermore, due to weak demand in end markets, steel producers’ ability to pass on these increases in raw material to customers are limited, resulting in narrowing price spreads.
Moody’s Vice President and Senior Credit Officer Kaustubh Chaubal said: "Despite an uptick in demand from the infrastructure sector, soft demand from the property and manufacturing industries will limit growth in steel demand in China, while demand in Korea and Japan will remain largely flat. India's steel demand will remain the strongest in Asia but slow to mid-single-digit growth, as weak auto and manufacturing demand offsets demand growth in the infrastructure and construction industries.”
Moody’s expects the increase in US tariffs on steel imports will have a limited effect on Asian steel producers due to the fact that they do not export high levels of steel to US. The worsening Korea-Japan relations are also expected not to have a major influence on Korean and Japanese steel producers.