Steel, aluminium producers in Asia Pacific region to face weak profit rating over the next quarter

The profitability of steel and aluminium producers in the Asia-Pacific region will continue to weaken over the next quarter at least, even in a soft landing scenario for China, according to Standard & Poor's Rating Services.

In a report entitled “Most Asia-Pacific Metal And Mining Companies Face Compressing Cash Flows In 2012" released on Thursday, the rating agency said commodity prices had declined from stratospheric levels in 2011, though prices of certain minerals such as iron ore and copper have possibly bottomed out in the first quarter of 2012.

“Nevertheless, a negative outlook for the steel and aluminum sectors in 2012 prevails due to lower cash flows,” it said.

The report said the steady credit quality of the Asia-Pacific mining sector will likely remain over the next 12 months, despite the fall in mineral prices from high 2011 levels.

S&P head of commodity ratings for Asia Pacific Suzanne Smith said miners in the region were still enjoying fairly decent margins compared with historical levels.

"Furthermore, supply-side constraints and a still-growing absolute demand will likely sustain prices close to those realized over the first quarter of 2012 for the rest of the year.

“Still, rising production cost from elevated fuel prices and higher labour and mining contractor costs is the key risk to credit quality for the mining sector,” she said.

Smith said steel and aluminium end-markets that were sensitive to fixed asset investments, including CONSTRUCTION [ ] and infrastructure, were most at risk from a slowdown.

Despite tough conditions, sustained capital investment in the metal sector will likely persist in 2012, she said

"Interestingly, we believe capital spending by metal companies will remain high in 2012, especially in the aluminium sector in China.”

"This is in sharp contrast to the experience in the US and Europe, where capacity is being reduced,” said Smith.