Global rating agency Moody's on Wednesday revised its outlook for the steel sector to negative following the rising input costs and inability to pass on higher costs to customers is pressuring the profitability of Asian steel producers. "We expect steel producers' profitability, as measured by EBITDA per tonne, will decline by around 15 per cent in the 12 months to June 2020, following an 8 per cent drop in the 12 months to June 2019," Moody's Corporate Finance Group associate managing director Chris Park said. Moody's noted that prices of iron ore and coking coal, two key steel making inputs, have surged by more than 60 per cent and 20 per cent in the year to June 2019 and will likely stay high for some time.
At the same time, weak demand in end-markets is limiting the ability of producers to pass on these prices increases to customers, resulting in narrowing product spreads, it 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," its vice president and senior credit officer Kaustubh Chaubal said. He further said India's steel demand will remain strongest in Asia but slow to mid-single-digit growth, as weak auto and manufacturing demand offsets the growth in the infrastructure and construction industries. Meanwhile, limited new capacity additions across the region will curb a sharp decline in steel prices, with production up only in India, where demand is still growing, and flat in China, Korea and Japan.
Moody's also expects the increase in US tariffs on steel imports will have a limited direct impact on Asian steel companies because of their modest US sales. "The worsening Japan-Korea relations will also not have a material impact on both, Korean and Japanese steelmakers," it said.