(Yicai Global) March 15 -- The Chinese government's plan to cut steel production capacity this year will help enhance the credibility of the country's major firms, including China Baowu Steel Group, currently rated at Baa1 negative, Moody's Investors Service said in a research note.
Reducing production capacity will help ease price competition and enable leading steelmakers to improve profitability and market share, said Zou Jiming, senior investment analysis at Moody's. The report added that profitability increased after China cut steel production capacity by 65 million tons last year.
After profit bounced back into the steel market last year and early this year, profitability will stay relatively low over the next 12 months, the report said, mostly due to oversupply caused by dwindling demand on the real estate market and declining exports resulting from high trade barriers. Rising iron ore and coking coal prices will also eat into steelmakers' margins.
At the end of last week, China said its target this year was to cut production by 50 million tons. The plan mainly targeted low-end production facilities and 'zombie' steel firms, with tightened control on new production projects.
China's medium- to large-sized steel companies swung from heavy losses in 2015 to a total gross profit of CNY30 billion last year, driven by strong price rises that resulted from a rebound in demand and significant production cuts.