Posted on 29 Feb 2016
In a statement today, Moody's said steel producers in Asia will see their overall earnings in 2016 fall to levels even lower than the weak results reported in 2015, while spreads will contract further.
The news seemed to have mix reactions on Bursa Malaysia-listed steel makers' share price.
At 11.52pm, shares in Wah Seong Corp Bhd was up one sen or 1.25% to trade at 81 sen, with 150,300 shares traded. Shares in CSC Steel Holdings Bhd gained one sen or 0.81% at RM1.25, after 132,800 shares changed hands.
Nevertheless, most of the steel makers were lukewarm against the news. Shares in Hiap Teck Venture Bhd was unchanged at 21.5 sen, albeit thin trading volume of 160,000 shares; while Ann Joo Resources Bhd was also unchanged at 63 sen, after 50,000 shares traded.
Prestar Resources Bhd was down one sen or 2.22% at 44 sen.
"Debt leverage for rated Asian steel producers in 2016 will remain high in 2016, after increasing significantly in 2015," Moody's vice president and senior analyst Jiming Zou said in the statement.
"Nevertheless, the levels in 2016 will likely fall year-over-year, due to corporate austerity measures," he added.
Zou pointed out that such expectations for the steel sector led to Moody's taking negative rating actions on most steel companies in recent weeks.
"As demand for steel in China declines further — against the backdrop of slower Chinese economic growth — the country's steel producers will continue to export their giant stockpiles of steel, pressuring prices in Asia," according to Zou.
"Anti-dumping measures and safeguard duties will slow Chinese export growth, but overall, volumes will remain high," he noted.
Zou said China is a giant steel consumer, accounting for half of all steel production globally, and three-quarters of such production in Asia.
Consequently, Chinese steel supply and demand dynamics show significant effects beyond the country's borders.
The global rating agency expects steel demand in China to fall another 5% in 2016, and exports to rise by a single-digit percentage.
The rating agency said large steel producers can improve their business scale and market share by acquiring small or inefficient steel producers that become unviable due to challenging market conditions.
However, the firm noted in terms of the Chinese market in particular, despite the government's efforts to consolidate the domestic steel industry, there is significant uncertainty over the pace of capacity reduction and rebalancing of supply and demand in the country.
According to Moody's, Chinese producers will underperform those in other parts of Asia, because of the massive supply situation in China.
"As for Korean and Japanese steel companies, they are better positioned to weather adverse market conditions, because of their focus on premium products, although earnings will stay below their historical levels," it added.
For major Indian steel mills, it said the ramp-up of new steel-production capacity, resumption of captive iron ore production and the government's introduction of minimum import prices, will help the sector mitigate earnings pressure during 2016.
