Meager China steel profits in 2014: Moody's

Profitability of Chinese steel companies will remain thin in 2014 as it takes time to reduce supply to a level more in line with demand, rating agency Moody's Investors Services said Wednesday in an industry report.

China is the world's biggest steel consumer and producer and in recent years, the iron and steel sector has been pummeled by weak demand, falling prices and suffered greatly from overcapacity.

The net profit margin of large and medium Chinese steel companies has fallen to zero as capacity growth has exceeded demand growth, Moody's said, anticipating that demand growth for steel in China will slow next year.

"China's tolerance for slower GDP growth and the switching of its growth engine to domestic consumption from infrastructure spending will moderate steel demand growth," it said.

China serves as a proxy for Asia as it accounts for 70 percent of the Asian steel industry's demand and production, Moody's said, forecasting demand growth of 2 to 3 percent in Asia for 2014.

Meanwhile, steel prices are likely to remain historically low in 2014, as the global supply-demand imbalance continues to put pressure on steel prices, it said.

Steel prices will weaken further if raw material prices decline, because foundries will reduce prices given their weak bargaining power with oversupplied customers. This in turn will pressure profitability.

Benchmark price of hot rolled steel sheet dropped to its lowest level after the global financial crisis and will remain at a similar level in 2014 as Chinese steel output forges ahead at record highs.

Moody's also said China's recent push to cut inefficient capacity will mitigate the supply-demand imbalance, but uncertainties remain as to the timing and the scale of the capacity cuts.

"Chinese steelmakers will continue to struggle at breakeven levels and remain the least profitable in Asia," it said.

Leading steel companies such as Baosteel, however, will show modest profit improvement and gain market share at the expense of their smaller domestic peers, as the government moves to reduce inefficient capacity, it added.

Moody's outlook for the Asian steel sector is negative for 2014.

China's crude steel consumption for 2013 is estimated at 693 million tonnes and it is expected to grow 3.2 percent year on year to reach 715 million tonnes in 2014, an industry expert said on Dec. 6.

Given China's current production capacity, the debt-laden steel industry will continue to struggle with overcapacity, said Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute.

Li said decelerated growth of downstream sectors, including machinery, electrical appliances and containers, is the major reason behind the slowdown of steel consumption growth in China.