Chinese steel companies are set to weaken this year after realizing gains in 2016, mostly due to weakening domestic demand thanks to excess capacity and inventory buildup last year.
"These factors will together depress steel prices, which have reached a four-year high, while elevated raw material prices and reduced exports will also weigh on the earnings of producers," Jiming Zou, a Moody's vice president and senior analyst, said in a recent report.
Moody’s believes China’s steel exports will decline this year by a high single-digit percentage amount on top of 2016’s decrease of 3.6%. “The decline will be driven by increased trade barriers outside China and a narrowing price gap between the domestic and international markets, which makes exports less attractive,” ratings agency analysts said.
Meanwhile, China’s government has set a goal of reducing steel production by 50 million tons this year, which should help relieve some of the pressure on steel prices and earnings. Fallout from this reduction, when combined with China’s efforts to improve state-owned companies’ efficiencies and productivity, could lead to larger firms buying up smaller ones in the sector.
– Nicholas Stern, senior editor