Moody's Investors Service says that China's push to reduce steel capacity is credit positive for Asian steelmakers, although the timing and scope of the capacity cuts are uncertain.

"The oversupply of steel in China is the dominant driver of the weak industry fundamentals in Asia's steel industry. The government's initiative will therefore be credit positive for most large steelmakers in the region. However, it is unclear as to the timing and scale of the capacity cuts," says Jiming Zou, a Moody's Assistant Vice President and Analyst.

Moody's conclusions are contained in its just-released report titled "China's Push to Reduce Steel Capacity Is Credit Positive for Asian Steelmakers."

Moody's report says large Chinese producers such as Baosteel Group Corp (A3 negative) will benefit the most, because while other inefficient mills are required to close, Baosteel, for instance, can increase its market share as it has received government approval to build new steel facilities in southern China. The company will also see its profits rise, as it raises capacity utilization.

Other steelmakers in the region such as POSCO (Baa1 negative) and Nippon Steel & Sumitomo Metal Corp (A3 negative) should also benefit from China's capacity reduction, but to a lesser degree.

Moody's report says the Chinese central government's intention to factor into the performance evaluations of local government officials, the effectiveness of steel capacity reductions, will provide additional incentives to improve the supply-demand situation in the industry.

Moreover, according to Moody's report, the costs of complying with Chinese environmental regulations continue to surge and will help accelerate the exit of inefficient steel mills.

Moody's estimates that the Chinese government's target to lower steel capacity by more than 80 million tonnes is -- according to data from the World Steel Association -- equivalent to reducing domestic production by 11% from the levels seen in 2012.