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Announcement:

Moody's: Global steel industry faces evolving credit risk from carbon transition

 The document has been translated in other languages

20 Mar 2018

New York, March 20, 2018 -- Efforts within the global steel industry to transition away from high carbon emitting processes pose varied credit risks to issuers given varying steelmaking routes and an uneven regulatory landscape across the sector, Moody's Investors Service says in a new report.

"Decarbonizing the global economy is likely to bring greater scrutiny on the energy and carbon intensity of the steel sector, which is responsible for 6% - 7% of global emissions," says John Thieroff, a Vice President with Moody's Investors Service. "The challenge to the steel industry will be to lower carbon intensity at a time of strong demand growth."

A key risk for steelmakers is that regulations for their emissions will vary by locale. Moody's sees the biggest challenge for emissions reduction to be in developing markets with a strong commitment to reduce emissions such as China. In contrast most developed countries already have strong policies in place to which steelmakers have adapted. However, future tightening of these policies would be challenging, particularly for companies not using modern technologies and processes.

While there remain numerous regulatory uncertainties regarding emissions reduction efforts across jurisdictions, it is clear that some operators will have an easier time adjusting than others. For example, weak profitability in the industry will weigh on the ability of many steelmakers to spend on clean technologies and processes. Weak profitability is reflected in the ratings skew towards high yield among the companies rated by Moody's (25 of 36 steel companies as of February 2018), highlighting the challenge ahead for companies to invest in emissions efficiency efforts.

Differences in production routes will also help determine winners and losers in the global steel industry's carbon transition. Blast furnace operators will bear much of the risk, while steelmakers using electric arc furnaces may have an easier time meeting goals.

Steelmakers' product mix will also be an important factor to consider. Companies with a high proportion of non-transport end markets — particularly construction, which comprises half the global steel market — are better protected from substitution. Automakers seeking to reduce weight to offset heavy batteries as they electrify will amplify steelmakers' already considerable substitution risk from lightweight materials such as aluminum and carbon fiber.

The report notes that there is no near-term large scale technological solution for the sector's carbon emissions. Carol Cowan, a Senior Vice President with Moody's Investors Service says, "New steelmaking technologies that would result in substantially reduced carbon intensity are in early phases of development, lack either commercial or technical viability, and are unlikely to gain widespread adoption in the next 10 years."

Moody's details these challenges in the report, and also reviews how carbon transition risk flows through the steel industry methodology. Moody's research subscribers can access this report, "Steel & Specialty Metals - Global: Carbon transition raises risk for steelmakers but effects will vary widely," at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1099398. See more of the Moody's research highlighting ESG considerations in credit analysis and the growth of green finance globally at www.moodys.com/esg.

*********************************************

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

John Thieroff
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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