Posted on 11 Nov 2015
Moody’s Investors Service says that Chinese steelmakers’ profitability will deteriorate further over the next 12 months owing to weak domestic demand, but this challenging situation should eventually accelerate capacity removals and restructuring over the next 1-2 years.
“Slow investments in real estate and infrastructure development as well as weakening manufacturing activity — against the backdrop of slower economic growth — will drag down domestic steel demand in the next 12 months,” says Jiming Zou, a Moody’s Vice President and Senior Analyst
“Moreover, profitability for China’s steelmakers will weaken further as capacity removals lag declines in demand,” adds Zou. “The slowdown in demand is worsening oversupply and sending Chinese steel prices to historic lows.”
Moody’s anticipates that Chinese domestic demand for steel will fall by 5% year-on-year over the next 12 months, and although rising exports will act as a partial offset, overall sales volumes will still fall 3%-4%.
Moody’s conclusions were contained in a just-released report on China’s steel industry, “Steel – China: Challenging Business Conditions Drive Capacity Removals and Restructuring”.
Moody’s also notes that, with lower raw material prices no longer offsetting price declines, large- and medium-size steel companies swung to an aggregate loss in the first eight months of 2015 from a profit a year ago, according to the China Iron & Steel Association.
However, many companies continue to operate their steel businesses through the temporary suspension of unprofitable production and/or asset disposals, an approach which delays the permanent removal of capacity and an end to lower capacity utilization.
However, Moody’s believes that capacity removals and restructuring will accelerate over the next 1-2 years, in view of the weak business conditions.
Specifically, small private steel mills will first exit the market, as they have limited resources to cover business losses, cash flow shortfalls and refinancing of maturing debt. Additionally, rising environmental compliance costs add to the pressure on inefficient steel mills.
