Fitch Ratings says in a new report that North Asian steel producers are likely to continue to see profit weakness in 2012 due to slowing domestic demand growth and an uncertain global economic environment. Flat steel producers, in particular, are likely to be hit hard.

"Credit profiles of leading North Asian steel producers have been supported by their strong balance sheet and prudent capex plans during this cycle trough," says Su Aik Lim, Director in Fitch's Corporates team. "However, if global risks escalate, leading, for example, to a repeat of the sharp 21.6% fall in global vehicle production ex-China in 2009, this could mean a sustained change in the structure of industry competition in the auto steel industry and, consequently, a weakening of North Asian steel credits."

Fitch expects China's steel production growth to slow to single digits. The country's structural shift towards consumer spending means demand growth for "long steel" products, arising from fixed-asset investments, will slow. For Japanese steel producers, which are dependent on steel exports and exports of manufactured goods, rising global risks are likely to weaken their performance. As for South Korean steel producers, production capacity increase has turned the country into a net exporter of steel, which in general faces a more competitive pricing environment.

More aggressive-than-expected capacity increase in North Asia will increase competition but Fitch believes expansion in new under-supplied markets such as those in southeast Asia and India would help broaden geographical diversification.

Fitch expects some softening of raw material prices in 2012, due to the twin effect of increasing raw material production easing a tight supply situation; and lower global steel production growth reducing demand for raw materials. Coking coal supply will also improve in 2012 over 2011, which was affected by the flooding in Queensland early this year.

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