Moody’s has adjusted its outlook for the Asian steel industry to stable from negative reflecting its positive expectations for the industry over the next 12 months.

The ratings agency said that it would consider changing the outlook to positive if the average profitability of major Asian steelmakers climbs 15% over the coming year.

Moody’s said that “We believe the profitability of Asian steel manufacturers bottomed out early this year and will increase moderately YoY in the next 12 months. The improvement will come as demand growth outpaces net capacity increases in China and drives higher utilization rates and as raw material costs continue to decline.”

Moody’s said that China’s steel production capacity would likely be flat this year and the next, mainly due to the slower addition of new capacity by steel mills and Beijing’s bid to accelerate the weeding out of inefficient capacity and retirement of old mills. This will be the key driver of the expected increase in capacity utilization and profitability.

The agency’s remark came as steel mills in the region have gradually increased their production at a time when prices of major steel products have fallen 2% since the middle of last month, while iron ore prices remained relatively stable at about USD 95 per tonne.

Industry experts said that the trend is likely to continue through this quarter and the next, as the global steel supply remains relatively abundant compared with demand. However, Chinese government’s determination to rein in its market’s oversupply problem could be the wild card next year.