Steel pains seen continuing for China, India – ratings agencies

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The Tata Steel plant in Jamshedpur

 

Restructuring and capacity cuts in China’s beleaguered steel industry will only increase due to a slump in demand, while any meaningful improvement in India’s steel consumption will be dictated by government spending in infrastructure, ratings agencies said, raising doubts over an immediate turnaround.

Moody’s Investors Service said in a report 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,” said 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,” Zou added. “The slowdown in demand is worsening oversupply and sending Chinese steel prices to historic lows.”

Fitch Ratings said that spending by the Indian government on infrastructure will be the catalyst for any meaningful improvement in domestic steel demand. The agency said in a report expects India’s steel consumption to improve modestly by 7%-8% in 2016.

High imports and soft steel prices globally in 2016 are likely to result in continuing profitability pressures for Indian steel producers. Their margins are likely to be lower in 2015, and improve marginally in 2016, supported by improving domestic demand and the imposition of safeguard duty on imports on certain steel products for 200 days, the report said.

Fitch has a Negative Rating Outlook on the sector.

The ratings agency said it expects the leverage of major Indian steel producers to remain high in 2016, and start to decrease meaningfully only by 2017. The debt levels of major Indian steel producers increased over the last three years due to capacity expansions. The high debt, along with profitability pressure, is likely to result in deterioration of leverage in 2015.

Moody’s said it 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%.

Its 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 noted 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.

In contrast, leading companies, such as Baosteel Group Corporation (A3 stable), should gain market share because of their strong product offerings and capacity expansions.

China’s crude steel production for October 2015 was 66.1 Mt, down by -3.1% compared to October 2014.

 

 

 

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