Stating that its outlook for Asian steel and coal sectors were negative in 2014, Moody's Investors Service said: "The negative steel industry outlook reflects the expectation that steelmakers' profits will remain historically low in 2014 as output remains high and demand growth slows."
The negative outlook for the coal sector reflects weak liquidity and elevated default risk for some companies with weak ratings as increasing production dampens the prospects for a meaningful rebound in the prices.
According to the report, "2014 Outlook - Asian Steel and Coal, Oversupply and Weak Prices Drive Negative Outlooks", the demand for steel would increase by 2-3 per cent next year as "China's government tolerates slower GDP growth and shifts economic growth drivers to domestic consumption from infrastructure spending."
The Chinese government's push to cut inefficient steel capacity would be credit positive for most large steel producers in the region. However, uncertainties remain as to the timing and the scale of the capacity cuts, it said.
"We expect thermal coal prices will remain flat at USD 80 - USD 85 per tonne and that coking coal will remain around USD 150 per tonne next year," the report said.
However, uncertain regulatory environments in China and India, the largest importers of coal, and in Indonesia, the largest exporter of seaborne coal, cloud the coal industry's supply-demand dynamics.
Moody's said it could revise outlooks to stable if the margins of the region's large firms start improving.