Asia’s steel makers set for harder times
Originally published by the South China Morning Post on March 3, 2016.
Plagued by oversupply and falling prices, steel companies in Asia will likely see their profits take a hit this year.
Among the deflationary forces, China’s producers are exporting and pushing down prices in Asia, exacerbating a supply glut, as they search for new market amid tepid domestic demand at home, according to a report by Moody’s investors service. On Tuesday, the US Department of Commerce imposed duties set at about 266 per cent for some steel producers in China – as well as duties on imports from other countries like Brazil, South Korea, Japan and Britain – that will be imposed within the next week in a bid to punish producers for dumping steel.
To tackle overcapacity and pollution in the industrial sector, China also plans to lay of 5 million to 6 million state workers from “zombie enterprises” in the next two or three years, Reuters reported on Tuesday.
Chinese steelmakers’ net exports grew 25.5 per cent last year while domestic demand contracted 5 per cent. Analysts expect domestic demand to fall a further 5 per cent this year. Exports of Chinese-made steel are likely to keep rising, albeit by a single digit percentage, analysts say.
While net exports grew 25.5 per cent, Chinese steel consumption fell by 5 per cent year-on-year last year. Analysts expect demand to fall 5 per cent further this year, and exports to rise by a single digit percentage.
Meanwhile, Asian steel companies will see debt leverage remain high this year, even as their ability to service debt is undermined by the substantial profit decline last year, the report said.
“Steel mills’ overall earnings will likely be lower than the weak levels in 2015 and significantly below their historical levels because production volumes and spreads will contract further amid the oversupply and resulting low prices,” the report said.
China producers like Baosteel Group will underperform their regional competitors, the report added. The company will likely see profits decline further this year as a result of the partial production suspension at its Bayi Iron & Steel subsidiary and high costs at its Zhanjiang steel plant.
Inventories have perked up recently, surging as much as 40 per cent among traders from early January’s low base, even as prices have ticked higher. HSBC analyst Chris Chen said in a February 26 release that the inventory figure is still 12 per cent lower year-on-year and 41 per cent lower than the same period in 2013.
“The current price upturn is only due to the expectation of seasonal demand recovery in a traditionally strong March to April and traders’ restocking,” Chen said. “The magnitude of demand driven by further restocking is minimal given increasingly tightened liquidity of traders and the shrinking number of traders.”
Steel companies tracked by Moody’s all reported lower earnings in 2015, reversing from gains in the prior year.
Indian steel maker Tata Steel reported that its earnings were nearly halved in 2015, while China Oriental’s slumped 43 per cent, Hyundai Steel slipped 10 per cent. Baoshan Iron & Steel reported a decline of 32 per cent, although the weak results was flagged in advance as the company suffered problems that included weak steel operations, foreign-exchange losses and asset impairment charges.
“Large steep producers can improve their business scale and market share by acquiring small or inefficient steel producers that become unviable due to challenging market conditions,” Moody’s said. “Despite the government’s efforts to consolidate the domestic steel industry [in China], there is significant uncertainty over the pace of the capacity reduction and rebalancing of supply and demand.”
Top steel companies from South Korea and Japan that focus on quality premium products will be more resilient to the downtrend, the Moody’s report said. Companies like POSCO and Nippon Steel, Sumitomo Metal Corporation and JFE Holdings have long-term contracts and leading technologies that should enable them to maintain higher margins.
Even so, these companies profits will remain below their historical levels because of the supply glut that’s depressing prices, the report said. POSCO saw its operating income fall 55 per cent year-on-year during the fourth quarter while its operating margin decreased to 2.5 per cent, down from the 4.6 per cent seen a year earlier.
“The companies also have leading technologies and long-term contracts with major automotive customers, both of which mitigate earnings pressure,” the report said. “That said, these companies are still exposed to the depressed regional steel prices.”
In India, infrastructure spending will likely lead to a demand pick up of the mid-to-high-single digits. However weak fundamentals will cause profits to remain below 2014 levels, the report said. India only accounts for 8 per cent of steel production in Asia.
Moody’s noted that major Indian steel producers will be shielded somewhat by the government’s introduction of minimum import prices for foreign steel.