Moody's Investors Service is expecting Asian steel manufacturers to report historically low profits over the next 12 months, prompting it to lower its outlook for the industry from stable to negative.
Demand for steel was expected to weaken in the second half of this year, owing to destocking and slower economic growth; particularly in China, a Moody's assistant vice president and analyst Zou Jiming said on Wednesday.
"Manufacturers, distributors and customers will reduce their stocks because of weak demand and excess steel supply in the Asian market; a move that will put further pressure on the overall profits of steelmakers," he said.
Zou was speaking on a just-released Moody's report titled, "Destocking, weak demand and excess supply depress steel manufacturers' profits."
Asian demand for steel is expected to grow at a slow pace of between 2% and 3% in the 12 months to June 2014, which is in stark contrast to the 16% compound annual growth rate between 2000 and 2010.
The slower demand was attributed to the China government's shift in emphasis from infrastructure spending to consumption and the country's slower GDP growth.
As Moody's report points out, data from the World Steel Association (WSA) showed that China accounts for over 70% of Asia's consumption and production of steel.
China Iron and Steel Association's data showed total inventory levels held by China's major steelmakers remain at historically high levels.
The WSA said China's monthly steel production decreased to 64.7 million tonnes in June from its record high of 67 million tonnes in May.
"Even if inefficient Chinese steelmakers lower production levels in the second half of this year to stem the losses they are facing, the reductions will not be enough to improve the supply and demand imbalances for steel.
"In addition, the supply-demand situation will worsen if China's GDP growth falls," Zou said.
Moody's report pointed out the outlook for Asia's steel industry also hinged on China's Purchasing Managers' Index (PMI) which fell to 50.3 last month from 50.8 in May.
Although the reading in July was up slightly from June's 50.1, the lowest level in the past nine months, China's PMI remained weaker than at the beginning of the year. The low reading indicates very limited expansion in the country's manufacturing sector.
Asian steelmakers would not benefit from the lower prices of iron ore and coking coal -- the two main raw materials used in producing steel -- because steel prices would also fall owing to the weak bargaining power of the manufacturers against their customers.
Nonetheless, Japanese steelmakers are better positioned than their Asian peers to maintain or increase their profitability slightly, because of the depreciating yen and the improving domestic economy.
However, South Korean steelmakers's profits would fall, due to a worsening supply-demand imbalance following capacity expansions by major domestic players, as well as a likely appreciation of the won against the yen and renminbi, and the weak demand from Korea's shipbuilding sector, which is one of the key end-users of domestically produced steel.
According to Moody's report, while Chinese steel mills would continue to sell products at close to or below breakeven cost, making them the least profitable of all their Asian peers, the profits of Indian steel manufacturers are helped by their management of input costs through their ownership of iron ore mines.
The Moody's report said the industry outlook could revert to stable if China's PMI improves and stays above 50, and if the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne for the region's largest steel makers does not deteriorate during the outlook period.