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The double whammy of high input costs and weak demand is expected to have squeezed margins of Asian steel makers in the June quarter, but the fall in profits could bottom out in the third quarter as seasonal demand picks up.

Analysts expect Asian steel makers to post lower profits for April-June and the hardest hit will be Japanese companies as the devastating earthquake and ensuing power shortages hit demand for key consumers such as car makers and ship builders.

Nippon Steel Corp. and JFE Holdings, the world's fourth- and fifth-biggest producers, are expected to post a 54 per cent and 83 per cent fall in profits, respectively, when they report their earnings on July 27.

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While those are expected to be the biggest drops during this year's Asia steel earnings season, their competitors in the region have also been hit by factors including the earthquake and tighter monetary policy in China and India.

As they move into the second half of the year, steel makers could be lifted by a recovery in steel demand led by China, the world's largest steel producer and consumer, but analysts said gains may be limited.

South Korea's POSCO , which trails only ArcelorMittal and Baosteel in the global steel maker rankings, will be the first mill in Asia to report second-quarter earnings, on July 22.

"POSCO was a key casualty of Japan's earthquake with oversupply in hot rolled coils from Japan spilling over to Korea," Merrill Lynch said in a recent report.

Regional oversupply has put pressure on POSCO's product prices at home and overseas, even as the steel maker raised its domestic product prices for the first time in nine months in April.

"But the problem is the third quarter, as more expensive raw materials will be used. POSCO is expected to give more discounts to customers as demand is not good except for the automotive sector," said Park Kee-hyun, an analyst at Tong Yang Securities.

Iron ore prices for the second quarter rose about 20 per cent from the first quarter, while tightening moves taken by developing economies such as China and India have bitten into steel firms' profitability.

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Japanese steel makers, with more than 40 per cent of revenue generated from exports, bore the brunt of the rising yen while the earthquake also knocked out some steel production.

Fitch Ratings said last week that it expected slower growth in steel demand and production during the second half of 2011 as developing nations fight inflation and developed nations address fiscal instability.

"Persistent overcapacity in China, sizeable capacity expansion in Korea and longer-term capacity increases in India, as well as a current glut in a sluggish Japanese market, should constrain price increases and trim margins," said Chris Park, a senior credit officer with Moody's in Hong Kong.

Tightening in China and India may cap growth in a big range of manufacturing sectors, limiting demand for steel, even if construction activities buoy demand, affecting China's higher-end steel makers' profits.

"Auto and home appliance sales will bottom out in the second half of 2011, which will help Baosteel's profits to improve somewhat this quarter," said Wang Chongyang, an analyst with Masterlink Securities Investment Advisory in Shanghai.

Baosteel supplies half the auto sheet used by the domestic market, but its orders have been hit heavily by slow auto sales after the withdrawal of state subsidies.

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India's top three steel companies are expected to see their margins contract by 300 to 370 basis points in the second quarter from a year earlier.

Tata Steel, the world's number 7 steel maker, is forecast to post a single-digit rise in April-June profit, as interest costs due to higher debt and rising raw material costs at European unit Corus keep margins subdued.

"The demand environment has deteriorated substantially in the past quarter owing to elevated inflation and interest rates," Kamlesh Bagmar, a metals analyst at Mumbai brokerage Prabhudas Lilladher, said in a recent note.

Mr. Bagmar also expects the impact of weak demand on the sector's earnings to be aggravated by high iron ore and coking coal prices and rising competition as mills race to expand capacity.

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