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“Oversupply in China's steel sector has been the largest headache for the region’s steelmakers and is likely to remain so. However, we have seen one private steelmaker default in China, and we believe the Chinese government is determined to weed out small uncompetitive and loss-making steelmakers,” the rating agency said in a report released on Monday October 6.

China’s Baosteel, Japan’s Nippon Steel & Sumitomo Metal Corp and South Korea’s Posco –among North Asia's largest steelmakers – lead the world in scale, operating efficiency, profitability, and technology but face many challenges. They include oversupply in China, continuing global weakness in demand for steel, and intensifying competition in the region, S&P's said.

Weak demand and squeezed profit margins made the early 2010s a tough period for the steelmakers, leading to each of them suffering cut in ratings by a notch in the past two years, S&P’s Tokyo-based credit analyst Makiko Yoshimura said.

However, the rating agency said it sees slightly better operating performance from the three big steelmakers in the next 12-24 months.

Their momentum remains somewhat weak, it added, noting that the companies' commitment and ability to execute on debt reduction will be key to their credit quality.