Market Watch reported that as South Korea's POSCO prepares to kick off quarterly earnings results season for Asian steel makers in the coming week, analysts are flagging concern that the weak trend in prices and demand may continue for a few more months because of slowing Chinese demand.
But at least one brokerage is forecasting a rebound in industry profitability from the fourth quarter of 2010 and is advising investors to start looking for an entry into steel shares.
Morgan Stanley analysts led by Mr Charles Spencer wrote in a report that "Whilst we have a cautious outlook for third quarter of 2010, we see an opportunity for improvement in the sector beginning in fourth quarter and continuing into 2011, if a few of the key headwinds begin to improve."
The analysts listed a relaxation in Chinese property and monetary policies, a reduction in industry overproduction and a recovery in the region's manufacturing activity after a recent slowdown as conditions that could improve steel industry fortunes from the fourth quarter onward.
Steel prices in Asia have seen a correction after China, both the world's largest producer and consumer of steel, began tightening policies to cool soaring urban property prices in April. But the full impact of the price correction is only expected to be felt in the third quarter that began July 1st 2010.
Morgan Stanley is expecting a 35% YoY growth in second quarter earnings per share for Asia Pacific metals and mining companies under its coverage, which would represent a 10% growth over earnings in the first quarter ended March 31st 2010.
Goldman Sachs expects Japanese steel companies to continue to be cautious after what will likely be a tough earnings reporting season later this month, and anticipates some of the country's steel mills to continue to refrain from providing forecasts.
Japanese steel giants Nippon Steel and JFE Holdings declined to provide forecasts when they announced quarterly results in April because of uncertainty over raw material costs and difficult market conditions.
Goldman Sachs wrote in a recent report that "We believe the upcoming earnings season will be a tough one for Japanese steel companies, with body language from companies likely to be more cautious than constructive. Visibility remains low, from a top line perspective as well as on material costs, and we expect companies to be quite circumspect."
The brokerage said that as compared with the first quarter, Korean steel makers' second quarter earnings are likely to be better than their Japanese counterparts' results. But a slowdown in the Chinese economy was expected weigh on the Korean companies' third quarter results.
Goldman Sachs said that "We believe that structurally things may start to revert to trend growth rates again in 2011, but for the balance of 2010, the outlook for shrinking margins and higher earnings volatility justifies our recent downgrade of the sector."