Bangkok--28 Oct--Moody's Investors
Moody's Investors Service has revised its outlook for the Asian steel sector to stable from negative, reflecting the agency's view that the fundamental credit conditions in the industry will firm over the next 12 to 18 months.
"Underlying demand has been improving, most notably in China and India," writes Terry Fanous, Moody's Senior Vice President and analyst, "driven by the government's stimulus program, which has a high, infrastructure-related expenditure component, and also by the recovery in the auto and property sectors."
Pressure from exports resulting from overcapacity in China, which currently produces about half the world's steel, remains a concern, and will likely dampen the extent of improvement in recovery, however.
"Our GDP growth expectations for the major Asian economies for 2010 points to improvement across the board, and we believe that in countries such as China, the steel industry will continue to be underpinned by infrastructure spending."
The profitability of the region's major issuers -- South Korea's POSCO, India's Tata Steel, and Japan's Nippon Steel -- has largely bottomed out and should improve, supported by higher capacity utilization rates, increasing steel prices and an adjusted cost structure due to lower prices for raw materials.
"The risk of overcapacity should subside gradually, as demand starts growing again in major markets around the world," writes Fanous. "Also mitigating this risk is that the bulk of China's domestic stimulus program remains to be spent, so that the key heavy users of steel -- the infrastructure, construction, autos, and durable goods sectors -- will continue to drive domestic demand."
"We note, however, that in the past China has over-estimated its consumption growth, which has led to over-supply -- a situation that the industry is now experiencing."
China's domestic steel prices declined by double digits from an August peak due to over-supply, which resulted in large inventory build-ups, and, in Moody's view, prices will stabilize as stock levels work their way down over the next 12 months.
"Still, the country's overcapacity will likely limit the degree of a recovery in prices in the region," according to Fanous.
In India, financial difficulties and problems associated with obtaining land have postponed large capacity additions for at least the near term, while in Japan a rebound in key consuming sectors (such as autos) is boosting steelmakers' capacity utilization beyond the break-even point of 70% for the previously loss-making sector.
The report, "Asian Steel Sector Stabilizes," can be accessed at www.moodys.com.