International credit ratings agency Moody's has announced that it has changed its outlook for the Asian steel industry to negative from stable, reflecting steelmakers' declining profitability amid a growing supply glut. The outlook had been stable since August 2014, when it was changed from negative.
"We expect Chinese steelmakers' earnings will decline considerably in the coming 12 months as the country's steel glut worsens amid declining demand and steady capacity," stated Jiming Zou, a Moody's vice president and senior analyst.
As China, which accounts for 70 percent of the region's steel demand, experiences weakening trends in real estate, infrastructure and manufacturing, Moody's expects steel demand to diminish, even as production continues, pressuring steelmakers. Steel demand from
Southeast Asia and India will likely increase but will be insufficient to offset the decline in China.
Additionally, Moody's noted that the steeper decline in raw material prices than in steel prices that improved the steelmakers' profitability in 2014 is unlikely to be repeated over the next 12 months. Steel prices have fallen more than iron ore prices this year, implying a decline in steelmakers' profitability.
The rating agency said that Japanese steel companies such as Nippon Steel & Sumitomo Metal Corporation and JFE Holdings will continue to benefit from the weak yen, despite slightly weaker demand in the country, whereas South Korean steelmakers' profits will come under pressure.