Asian steelmakers' China troubles won't be resolved soon. Southeast Asian countries' spread on hot-rolled coil dropped 46% in 2024, compared with the average set in 2021, amid an influx of cheap Chinese steel. S&P Global Ratings believes this profitability squeeze will continue in 2025, and will be broadly credit negative for regional producers.

No obvious fixes:  The factors contributing to excess Chinese steel supply in 2024 will be very much in place next year. China has been dealing with excess steel capacity largely since its property sector entered a prolonged downturn in 2021. Several Asian countries have looked at countering Chinese imports with antidumping measures, but such tariffs would take years to enact.

Uneven pain:  While cheap Chinese steel will squeeze all Asian steel firms, the effects will vary depending on the markets in which they are based. We look at the impact by region, and on each rated issuer. Our analysis follows a commentary we published last month that discussed the resilience of China's steel exports to rising trade tariffs (see "Trade Tensions Won't Tarnish China Steel Exports," published on RatingsDirect on Oct. 15, 2024).

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How Rising Chinese Steel Exports Will Affect Asian Markets

India: Cheap steel imports from China will push down prices in the domestic steel sector, eroding the profitability of the country's steelmakers.

The strains come just as major Indian steelmakers are investing heavily to meet the National Steel Policy goal of nearly doubling crude steel capacity to 300 million tons (mt) by 2030. We expect the weaker spreads, if protracted, could weigh on the operating cash flows of producers, potentially delaying their expansion.

Steel imports into India rose 50% year on year to about 8 mt in the first nine months of 2024. This tipped India into becoming a net importer of steel, with imports exceeding exports by more than 2 mt during this period. The industry is lobbying the government to impose import tariffs to protect the country's steel sector. While such restrictions could offer immediate relief, the industry's profitability will remain vulnerable unless there is a meaningful reduction in steel imports from China.

Indonesia: Steelmakers' spreads will likely continue to drop, in spite of resilient domestic demand.

The country remains a net importer of steel despite healthy increases in its domestic capacity. Its reliance on imports partly stems from low utilization rates due to operational disruptions. These expose the domestic steel industry to cheap steel from China, Indonesia's biggest source of steel imports.

In response, the government plans to impose antidumping duties on flat-rolled iron products imported from China, South Korea and Taiwan.

Korea: While the country recently launched an antidumping probe into Chinese steel, we do not expect tariffs to be implemented in the next 12 months.

The recent surge in Chinese steel imports mainly involves steel plates used in shipbuilding, along with hot-rolled coil used in construction and home appliances. These imports into Korea had a direct hit on Korean steelmakers in terms of reduced steel spreads and, subsequently, profitability.

Japan: The price impact from surging imports from China should be muted.

Imports only account for about 12% of Japan's steel consumption, and Chinese firms only account for a small part. However, 40% of Japan's steel production is exported to Asian countries. In other words, 40%-45% of revenue for Japanese steelmakers is generated from exports. Chinese exports will erode the prices and margins for such trade. We expect the trend for depressed margins to continue as long as China's export drive continues.

Moreover, we believe that if Japan continues to refrain from imposing antidumping tariffs on Chinese steel producers, rising levels of cheap Chinese steel imports will disrupt the Japanese steel industry.

Media reports in Japan suggest the government may extend the scope of antidumping duties to include steel products. The timing and magnitude of such steps, if they happen at all, are unclear.

Credit Implications For Rated Steelmakers

Tata Steel Ltd. (BBB/Stable/--)

We expect a gradual recovery for the firm over the next 12-18 months due to reduced losses in the U.K. and a ramp-up of the Kalinganagar plant in India.  A steep correction in domestic steel prices due to elevated imports has resulted in lower steel spreads for Indian steel companies, including Tata Steel. Lower regional steel prices have also hit Tata Steel's exports, which now account for less than 5% of Indian sales, down from 10%-15% a few years ago.

A prolonged weakness in steel spreads could delay any recovery that may be ahead for this company.

Krakatau Posco PT (BBB-/Negative/--)

Pricing will remain under pressure for Krakatau Posco, due to continued cheap imports from China.  On Sept. 23, 2024, we revised our ratings outlook on Krakatau Posco to negative from stable to reflect the company's performance in 2024, which was weaker than we expected. The company recorded a sizable operating loss in the first half of 2024. Falling sales volumes due to moderating demand in Indonesia, and disruptions caused by repair work at its plants, drove that weak performance.

Moreover, the firm was dealing with weaker pricing power amid a surge in cheap imported steel in Indonesia, the appreciation of the U.S. dollar against the Indonesian rupiah, and a lag in reflecting lower raw-material costs in its cost base, due to existing inventory.

In the firm's recently announced third-quarter results, the company managed to return to profitability, reverting to an operating profit from a loss in the first half. This was driven by volume recovery, lower raw material costs, and a tailwind from favorable foreign-exchange effects. Nevertheless, we continue to see the pricing pressure on the firm.

Posco Holdings Inc. (A-/Stable/--) and Hyundai Steel Co. (BBB/Stable/--)

The surge in steel supply from China will continue to hit the profitability of Korean steelmakers, including that of Posco Holdings and Hyundai Steel.  Declines in prices for hot-rolled coil and steel plates used within the shipbuilding sector have hit the Korean firms in particular. While drops in raw material prices should provide some relief for steel spreads, steady pressure on selling prices will likely weigh on the firms' profitability.

Posco Holdings is also undertaking financial improvement measures such as asset sales and cost cutting. However, the large capex burden related to battery-material investments, along with subdued steel profitability, will likely keep the headroom on the ratings at quite a thin level.

Nippon Steel Corp. (BBB+/Watch Neg/--)

We expect utilization rates to improve next fiscal year while major producers--including Nippon Steel--cut capacity by closing blast furnaces.  Their efforts follow about five years of restructuring involving closed facilities. However, any gains will come off a low level, with domestic steel demand at 55 mt-60 mt, a more than 40% decline from the peak in 1990.

Further capacity cuts at Nippon Steel should scale back its export ratio, currently at 40%-45%. This will shield the firm somewhat from turbulence in the Asian steel market.

Nippon Steel is more focused on high-grade steel, which is less sensitive to market conditions. The firm has locked in supply relationships with large customers, such as automakers, which are less price sensitive and more focused on the secure supply of quality steel. In addition, Nippon has followed a growth strategy focusing on India and the U.S., where are less dependent on Chinese steel. All these factors will likely somewhat protect the entity from ongoing cheap Chinese exports.

China Baowu Steel Group Corp. Ltd. (A-/Stable/--) and Baoshan Iron & Steel Co. Ltd. (A-/Stable/--)

We don't expect neighboring countries' trade restrictions to have any material impact on rated Chinese steelmakers.  Their efforts to geographically diversify exports should allow the entities to expand sales offshore even as trade barriers appear in individual countries.

The firms also focus on high-value-added steel products, which are usually not the target of antidumping duties. Importing countries generally impose tariffs on hot-rolled coil steel, an essential input to build infrastructure.

Baosteel (the flagship subsidiary of Baowu) aims to promote the export of specialized steel products, including cold-rolled automobile steel products and silicon steel products used for the new-energy market. By developing new markets and by optimizing the structure of its exports, Baosteel's export volume of automotive steel increased 62% year-on-year in 2023.

Baosteel also aims to raise its export volume to 10 mt by 2028, from 5.8 mt in 2023. The company's exports of steel products in the first nine months of 2024 reached a high of 4.66 million tons. Despite the rise, exports only accounted for 12% of the firm's total steel output in the first three quarters of 2024.

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To Serve Or Protect?

The rise of cheap Chinese steel poses a conundrum to governments: should they protect their domestic industrial champions, or should they reap the benefits of a cheap input so key to development?

We have a clear view on the credit effects of China's ramped-up steel exports: they are negative. However, this is quickly becoming a political matter, on which we have less visibility. The strains will likely continue in 2025 but we leave space in our assumptions for policy wildcards.

Writer: Jasper Moiseiwitsch

Related Research

• Krakatau Posco's Q3 Turnaround Should Improve Leverage, Nov. 4, 2024
• Trade Tensions Won't Tarnish China Steel Exports, Oct. 15, 2024
• Tata Steel Ltd., Sept. 24, 2024
• Steelmaker PT Krakatau Posco Outlook Revised To Negative On Weak Performance In 2024; 'BBB-' Ratings Affirmed, Sept. 23, 2024
• Posco Holdings Inc., July 18, 2024
• Nippon Steel Corp., July 12, 2024
• Weakness In Steel Demand To Deflate Baowu's Deleveraging Push, May 13, 2024
• Hyundai Steel Co., March 13, 2024