Rating agency Moody’s on Wednesday assigned a stable outlook for the Asia-Pacific?s steel sector over the next 12-18 months. ?Our outlook reflects our expectation for continued growth in regional demand, particularly from China,? says Chris Park, Moody?s vice-president?senior analyst.
China will continue to play a decisive role in the prospects for the steel sector given the country?s robust economic growth and its status as the largest consumer of steel.
According to the rating agency, steel makers? profitability in Japan and Korea should improve considerably in 2010 and 2011 because of a recovery in domestic demand ?? although the recovery is still low compared to pre-crisis levels ?? and rising exports. Steel makers in the region will also benefit from the Chinese government?s recent abolition of export tax rebates, as this will ease the threat of imports from that country.
India?s domestic steel demand remains robust with apparent demand this year growing in the mid teens, led by good demand for autos and engineering services. The outlook for the domestic operating environment in India is positive, as it expects strong momentum in demand over the medium term, driven by robust growth in infrastructure, autos and construction.
On the negative side, Moody?s expects that the degree of improvement in steel makers? margins will be constrained by softening steel prices and higher input costs, which steel makers will not find easy to pass on to customers. Volatility in margins could also ensue from high input costs that are tied to the previous quarter?s spot rate being out of sync with end demand in the following quarter.
In addition, the move to quarterly pricing could cause a quarterly mismatch of average selling prices and raw material prices, raising short-term earnings volatility.
?Any unexpected weakness in China?s economy could have a material impact on the fortunes of the sector and threaten our stable outlook although we do not expect anything untoward to occur in the near term. Our central scenario for China?s economy assumes robust GDP growth over the next couple of years,? Park added.