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Moody's: Asian steel producers will report lower earnings

Staff writer |
Moody's Investors Service says that steel producers in Asia will see their overall earnings in 2016 fall to levels even lower than the weak results reported in 2015.

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Production volumes and spreads will contract further, against the backdrop of oversupply and the resulting low prices.

"Debt leverage for rated Asian steel producers in 2016 will remain high in 2016, after increasing significantly in 2015," says Jiming Zou, a Moody's Vice President and Senior Analyst.

"Nevertheless, the levels in 2016 will likely fall year-over-year due to corporate austerity measures."

Zou points 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," adds Zou. "Anti-dumping measures and safeguard duties will slow Chinese export growth, but overall volumes will remain high."

Zou explains that China accounts for half of all steel production globally, and three-quarters of such production in Asia. It is also a giant steel consumer. Consequently, Chinese steel supply and demand dynamics show significant effects beyond the country's borders.

Moody's analysis is contained in its report "Steel Producers — Asia: Supply Glut and Low Prices Will Reduce Earnings and Keep Leverage High in 2016," and is authored by Zou.

Moody's report says that in 2015, China's apparent steel consumption declined 5% year on year, while net exports grew 25.5%. Moody's expects that steel demand in China will fall another 5% in 2016 and exports will rise by a single-digit percentage.

Moody's says that large steel producers can improve their business scale and market share by acquiring small or inefficient steel producers that become unviable due to the challenging market conditions.

However, 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 the capacity reduction and rebalancing of supply and demand in the country.

On specific steel markets, Moody's report says that Chinese producers will underperform those in other parts of Asia, because of the massive supply situation in China.