Asian steel earnings are expected to rebound

Moody’s Investors Service said today that with the slowdown in production capacity and rising utilization, the profitability of Asian steel producers will increase slightly in 2015, supporting the stable outlook of the industry.

Moody’s Assistant Vice President and Analyst Zou Jiming said, “We believe that the profitability of steel producers has bottomed out and will rise slightly in 2015.”

“The demand for steel may increase slightly by 3%, and the growth rate will exceed the net increase in production capacity, which will push up capacity utilization. The decline in raw material costs will also support the profitability of steel companies,” adds Zou Jiming.

Zou Jiming made the above comment on the occasion of Moody's announcement of the outlook for the Asian steel industry in 2015. The outlook reflects Moody's expectations for the 2015 steel industry operations.

Moody's said in the report that China's steel demand and capacity growth dominate the Asian steel industry outlook, because China is by far the largest steel consumer and producer in Asia. However, due to domestic oversupply, the profitability of Chinese steel companies is still at the lowest level in Asia.

However, the status of iron and steel companies in various Asian countries varies.

Moody's predicts that in China, as the government cuts inefficient production, the status of leading steel companies such as Baosteel Group Co., Ltd. (A3/Stable) will improve modestly, capturing more market share from small and medium-sized steel companies.

In Japan, the reviewed Japanese steel companies Nippon Steel & Sumitomo Metal Corporation and JFE Holdings, Inc. are more likely to increase profitability than other Asian companies, which to a certain extent benefit from the growth of their domestic economy.

In South Korea, POSCO and Hyundai Steel Co.'s earnings will rise due to capacity expansion, and POSCO will also benefit from the earnings growth of non-steel business.

The increase in production capacity and the high utilization rate of existing plants will increase the profitability of large Indian steel companies such as JSW Steel Limited, SAIL and Tata Steel Ltd.

If Moody's expects the 2015 annual tonnage EBITDA of major steel companies to decline by 15% and China’s purchasing managers index falls from 50.8 in October to below 50, the industry outlook may be lowered to negative.

Moody's said that if large steel companies' EBITDA per ton steel increase by 15% or more, the industry outlook may be revised to positive.