Reuters reported that Asian steelmakers face a bleak profit outlook as demand growth weakens with a slowing global economy and as they fail to fully pass on high production costs, but Chinese moves to trim output may prop up steel prices.
Steel mills are sitting on high cost raw materials purchased during the previous quarter, but softening demand from auto makers, shipbuilders and contractors is making it difficult for them to fully pass along expensive costs to customers.
Japanese producers, which serve the world's top car makers, are also grappling with a soaring yen that hits exports and domestic demand which is set to weaken following the end of the government's economic stimulus measures in September.
South Korea's POSCO will set the tone for the industry when it kicks off earnings by major steel mills next week. POSCO is forecast to report a 28% drop in profit from this year's peak in the second quarter.
Analysts said that POSCO's earnings may deteriorate further in the fourth quarter because two price hikes this year were not enough to cover expensive raw materials costs, which Japanese rivals Nippon and JFE also failed to fully pass on to customers.
Mr Kim Yun sang analyst at IBK Securities said that "POSCO's profit is expected to improve only in the first quarter, as softer raw materials prices will be reflected from December 2010. Should the Chinese market recover, POSCO earnings are expected to rise modestly in the first half of 2011 after bottoming out in the fourth quarter of 2010."
Steel mills are pinning their hopes on China as the world's biggest steel producer now strongly pushes for industry restructuring with output cuts to meet its energy saving target. Still, with China looking to cool its economy, softening demand from the world's biggest steel consumer remains a concern.
Mr Kim said that "China's policy directions are the major factor for Asian steelmakers at the moment there's big uncertainty about the Chinese market and the extent of its recovery."
China's Baosteel and its rivals are expected to post weaker profits or even losses in the third quarter, hit by higher costs and lower product prices due to oversupply at home and weak demand due to Beijing's measures to cool the property market.
Analysts said that Baosteel's net profit is expected to fall by almost a third to CNY 1.3 billion, in line with its previous guidance, which implies a third quarter profit of between CNY 800 million to CNY 1.5 billion.
In Japan, Nippon Steel Corporation and JFE Holdings Inc could see their July to September quarterly earnings decline from the preceding three months, as they failed to achieve planned volume increases and price hikes. Japan's steel exports dipped 0.6% from a year earlier in August for the first time in 13 months as Japanese mills curtailed exports of high grade steel sheet to protect prices.
After the government ended subsidies on eco friendly cars, some Japanese manufacturers expect domestic car production to fall nearly 20% starting from October 2010.
Mr Shinya Yamada, an analyst at Credit Suisse, said in a research note that "With demand for steel expected to fall, their contract price for key customers will likely decline." He added that both Nippon Steel and JFE to lower full year earnings forecasts.