Moody’s Investors Service in a new report said that rising input costs and an inability to pass on higher costs to customers is pressuring the profitability of Asian steel producers.

This has forced Moody’s to recalibrate its outlook for the sector to negative.

India’s steel demand will remain the strongest in Asia but slow to mid-single-digit growth

“We expect steel producers’ profitability — as measured by EBITDA per ton — will decline by around 15 percent in the 12 months to June 2020, following an 8 percent drop in the 12 months to June 2019,” says Chris Park, an associate managing director in Moody’s Corporate Finance Group.

The report noted that prices of iron ore and coking coal, two key steelmaking inputs, have surged by more than 60 percent and 20 percent in the first semester of 2019 and will likely stay high for some time. At the same time, weak demand in end-markets is limiting the ability of producers to pass on these price increases to customers, resulting in narrowing product spreads.

“Despite an uptick in demand from the infrastructure sector, soft demand from the property and manufacturing industries will limit growth in steel demand in China, while demand in Korea and Japan will remain largely flat,” adds Kaustubh Chaubal, a Moody’s vice president and senior credit officer, and co-author of the report.

“India’s steel demand will remain the strongest in Asia but slow to mid-single-digit growth, as weak auto and manufacturing demand offsets demand growth in the infrastructure and construction industries.”

Meanwhile, limited new capacity additions across the region will curb a sharp decline in steel prices, with production up only in India. Demand in India is still growing and flat in China, Korea and Japan.

Moody’s expects the increase in US tariffs on steel imports will have a limited direct impact on Asian steel companies because of their modest US sales. The worsening Japan-Korea relations will also not have a material impact on both, Korean and Japanese steelmakers.