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MANILA, Philippines - Copper and iron ore prices may have bottomed out in the first quarter of this year but profit for the steel and aluminum sector may remain subdued in the next three-month period, according to Standard & Poor's Ratings Services.
In a report, S&P said the credit quality of the Asia-Pacific mining sector would remain in the coming year even with the drop in mineral prices from the highs seen last year.
The rating firm's outlook for the region's metal sector is negative because of a combination of overcapacity and sluggish demand growth.
However, "miners in the region are still enjoying fairly decent margins compared with historical levels," said Suzanne Smith, head of Commodity Ratings for Asia Pacific at S&P.
"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," she said.
But higher production costs arising from more expensive fuel, labor and contractor costs remain a threat to the credit rating of companies in the industry.
"We believe the profitability of steel and aluminum producers in the region will continue to weaken over the next quarter at least, even in a soft landing scenario for China," Smith said, adding that steel and aluminum end-markets, which are sensitive to fixed asset investments, are most at risk from a slowdown.
She said capital investments in the metal sector would continue throughout the year.
"Interestingly, we believe capital spending by metal companies will remain high in 2012, especially in the aluminum sector in China. This is in sharp contrast to the experience in the U.S. and Europe, where capacity is being reduced," the analyst said.
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