Rising costs of raw materials and the inability to compensate for them through higher prices are putting pressure on the profitability of Asian steel companies, Moody’s Investor Service reports. Analysts also revised their outlook for the sector to negative.
“We expect steelmaker margins to fall, measured in EBITDA per tonne of finished steel, to decline by about 15 percent in the 12 months to June 2020, following an 8 percent drop for the 12 months of 2019, "the message says.
Prices for iron ore and coking coal, the two main ingredients for steelmaking, have risen more than 60 percent and 20 percent, respectively, since the beginning of the year. The most likely scenario is that commodity prices remain inflated for a long time, Moody’s said.
At the same time, weakening demand in the end-user markets limits the ability of steel producers to shift the rise in raw material prices to the buyer, which leads to narrowing commodity spreads.
Despite rising demand in the infrastructure sector, weak manufacturing demand will limit steel demand growth in China, while steel consumption in South Korea and Japan remains unchanged, ”Moody’s writes.
According to analysts, the strongest demand for steel will be in India, especially from infrastructure, but there will also be strong pressure due to weak demand for cars and a slowdown in the construction industry.
The limitation in China and other countries on the commissioning of new capacities remains a safeguard against a sharp drop in steel prices in Asia. Nonetheless, Moody’s expects the increase in US duties will have a limited direct impact on Asian metals companies. The continuation of the diplomatic conflict between Japan and South Korea may pose minor risks.
