Bangkok--12 Dec--Moody's
Moody's Investors Service says the fundamentals of the Asian steel industry remain solid but that much depends on China in the coming 12 to 18 months. However, a major theme will continue to be event risk as Asian companies position themselves for, or are impacted by, the global consolidation trend.
In a new global study, Moody's says that several underlying factors are supporting what the rating agency perceives as fundamental and structural change; namely, global consolidation, permanent increases in cost platforms, and greater industrialization in major emerging countries.
"Asia remains a major driver for the global steel industry, with China's dominant role in both production and consumption", says Terry Fanous, Senior Vice President, based in Sydney.
"India is also emerging as a major force in Asia with more than 25 million tons of new production capacity planned over the next 5-7 years," adds Fanous.
"Looking into 2007, fundamentals are expected to remain supportive of Asia's steel sector, considering the expectation for continued solid GDP growth in China and the PRC government's measures to manage down the level of exports", says Fanous.
"Having said that, Asian steel fundamentals over the next 12-18 months will largely depend on China's ability to manage both the growth in its production capacity as well as the rise in its major consuming sectors, such as construction," says Fanous, adding, "It's a fine balance, and any major shifts in demand or supply will undoubtedly impact the regional
environment."
Within Asia's rating universe, POSCO and Tata Steel maintain the most favourable cost positions. In the case of POSCO, the combination of its excellent financial profile and continued focus on reorienting production toward higher grade output has strengthened its credit profile, culminating in the recent change in its A2 rating outlook to positive from stable.
Fundamentally, Tata Steel is well-positioned in India's steel sector.
While the domestic industry is bracing for substantial additional capacity, strong economic growth and large national infrastructure projects over the medium-to-long term will provide support for the industry, although excess capacity will be exacerbated in certain years.
Tata Steel, as well as other smaller domestic integrated producers, is well positioned to benefit from this trend, aided by the competitive nature of its operations and India's substantial iron ore reserves.
A major theme for the industry has been global consolidation activity, driven by the desire to achieve greater market share and diversity, cost leadership and operating flexibility.
"Tata Steel's recent bid to acquire Corus highlights the consolidation activity evident in the industry," adds Alan Greene, Senior Vice President and Moody's lead analyst for the Indian company.
"The acquisition will weaken Tata Steel's financial profile (its Baa2 rating is on review for downgrade), although it would bring along increased scale and diversity, and improved efficiency" says Greene, who is based in Singapore.
In the case of POSCO, it has so far avoided major M&A transactions, opting instead for partnering arrangements with other producers such as Nippon Steel. Its strong financial profile and competitive operations also expose it to the potential of becoming an M&A target. The company's rating incorporates an expectation that it will maintain shareholder-friendly capital management initiatives as part of its desire to remain independent.
Looking at individual product segments, the Moody's outlook says China's excess supply of long products and lower grade flats remains a major factor for the region, limiting any substantial growth in prices. Higher end products, however, should maintain a reasonably solid position into 2007 due to tight a demand/supply balance.
Furthermore, in the current industry environment, Moody's remains concerned about the operating position of small players such as G Steel (rated B2), given the material impact price fluctuations have on their financial and liquidity profiles. Despite potential synergies and its improved domestic market position from its recent investment in NSM, G
Steel's rating was lowered due to concerns over its weakened financial profile as a result of additional debt and increased risk appetite. The new Moody's report "The US and Global Steel Industry 2007 Outlook -
Consolidation supports fundamentals" can be found at www.moodys.com