Moody's Investors Service has revised its outlook on the Asian steel industry to stable from negative.

''The improved outlook mainly reflects our expectation that the profitability of Asian steel manufacturers will increase moderately year-on-year in the next 12 months,'' says Jiming Zou, a Moody's assistant vice president and analyst.

''The improvement will be mainly driven by faster demand growth than net capacity increases in China, which will result in higher utilization rates. China is the key driver for the Asian steel industry, because the country accounts for a large proportion of steel production and consumption in the region,'' adds Zou.

Moody's expects steel demand growth in China to slow to about 3% during the next 12 months from about 9% in 2013 because GDP growth, fixed-asset investment and housing construction will slow.

However, this level of demand growth will still outpace projected net capacity growth, which will be largely flat. The low level of net capacity additions will be owing to the slower pace of new capacity additions and the acceleration of the removal of inefficient capacity by the Chinese government (Aa3 stable).

While Moody's expects the benefit from lower input cost of iron ore and coking coal to decline over the next few months, as pressure on steel prices increases, the lower costs will continue to help steelmakers improve their profitability.

On specific markets, according to Moody's, Japanese steelmakers will remain better positioned than other Asian steelmakers to increase profitability, due to a favorable domestic supply-demand balance and a weak yen.

In Korea, Moody's says steel fundamentals will be less supportive than in other economies in the region, because the strong won results in increased competition from Chinese steelmakers.

As for India, Moody's report says steel consumption levels should improve, once the newly elected government's infrastructure spending policies are implemented.

Moody's would consider changing the industry outlook to positive if Moody's believes the EBITDA per tonne of major Asian steelmakers will increase by 15% during the coming 12 months.

On the other hand, a return to a negative outlook would be triggered if manufacturing activity in China declines - as indicated by China's purchasing managers' index falling below 50 - and if Moody's estimates that the EBITDA per tonne for major steelmakers will fall by 15%.