The steel industry's outlook in Asia is stable next year based on an assessment of broadly steady profitability for rated steelmakers over the next 12 months, says Moody's Investors Service.
"In 2019, demand for steel in Asia will likely stay at levels similar to that of 2018, indicating a softening from the robust growth seen in 2018," said Kaustubh Chaubal, Moody's vice-president and senior credit officer. "As for profitability, rated Asian steelmakers will see their profitability levels weaken mildly because of a decline in Chinese demand growth, but stay strong overall."
Strong profitability is underpinned by robust demand in South and Southeast Asia, as well as China's capacity cuts and strict environment protection measures, he said.
The steel industry in China will drive the outlook for the sector in Asia because China is by far the region's largest steel customer and producer, according to Moody's.
"Our forecast of flat steel demand in China for 2019 reflects higher infrastructure spending that will limit negative effects of the ongoing Sino-US trade disputes, and slower growth in China's real estate investments," said Kai Hu, a Moody's senior vice-president.
Escalation of the US-China trade dispute will have a limited effect on Asian steel demand, given the moderate indirect impact through supply chains and manageable direct macro impact, Moody's said.
The spillover effects could, however, be greater and potential US tariffs on imported vehicles pose key downside risks to Japanese and Korean steelmakers, according to the international credit rating agency.
Moody's expects China's capacity cuts and stringent environmental measures to mitigate weaker steel demand growth.
The stable outlook also reflects China's purchasing managers' index, which remains above 50 -- indicating expansionary manufacturing activity -- despite declining in recent months.
Business conditions and profitability will vary by company and the particular economy that steelmakers operate in.
In India, in particular, the consolidation in the steel sector and solid demand for steel will support the robust profitability of Tata Steel Ltd and JSW Steel Ltd, according to Moody's.
With Japanese and Korean steelmakers, the profitability of rated companies will diverge because of their differing exposure to various end-markets.
For Japanese firms, profitability will hold steady or improve slightly, but for Korean steelmakers like Posco and Hyundai Steel, profitability will fall moderately in 2019, Moody's said.
