Rating agency Moody's has revised the outlook for the Asian steel industry to 'negative' from 'stable' as it expects profits of steel firms in this region to decline in the second half of 2013 on the back of slow demand growth, over-supply coupled with destocking.
"The negative industry outlook reflects our expectation that Asian steel manufacturers' profits will decline in the second half of 2013 and remain at a historically low level over the next 12 months as destocking kicks in, demand growth remains slow and excess supply continues," the rating agency said in a report.
It also said that demand for steel would not grow more than 2-3 per cent through June 2014.
Talking on the profitability aspect, the report said that steelmaker's profits would remain at a historically low level in Asian region due to Chinese overcapacity.
It further said that there was also downside risk to the profitability factor if Chinese economy slowed down further, aggravating the demand-supply imbalance.
The report also noted that despite fall in key input prices like coking coal and iron ore, steel firms wouldn't benefit due to slow demand growth.
"Major suppliers have reduced raw material prices as a result of their increased production capacity amid slower growth in the steel industry. However, steelmakers won't benefit from the input-price declines, as they will reduce steel prices given their weak bargaining power with customers amid the oversupply," it said.
The report, however, pointed out that within the Asian region, there would be disparities among various regions.
As per the rating agency, Japanese steel manufacturers are better placed than other Asian steel makers to maintain or increase their profitability on the back of a depreciating yen and improving domestic economy.
Similarly, Moody's said steel demand in India had slackened along with a slowing economy.
"In the first half of 2013, year-over-year steel output in India rose by 2.5 per cent according to WSA (World Steel Association), much lower than the high-single-digit percentage growth rates in the last few years," it said.
The recent depreciation of the rupee will result in some import substitution but will have small impact on their profitability due to limited export sales, it added.
The report, however, noted that Indian steel mills, including those operated by Tata Steel, continued to show stronger profitability than other rated steel manufacturers in Asia because of their ownership of iron ore mines, which helps them manage their input costs.
On the Chinese steel mills, it said that they would continue to sell their products at near or below break even cost levels and exhibit the lowest profitability among Asian peers.
Meanwhile, the Korean steel makers will weaken amid unfavourable exchange rate movement and a worsening supply-demand imbalance, it added.