Moody's Japan KK has placed its A2 senior unsecured debt ratings on Nippon Steel Corporation as well as the Baa1 rating on its SPV's preferred securities under review for possible downgrade.

The review has been prompted by increased concerns over delays in the recovery of NSC's financial metrics. The expectation is based on Moody's view that there will be a continued and possibly intensifying imbalance of supply and demand in the global steel industry, and that as a result, NSC is likely to experience stagnant profitability even with the culmination of its proposed integration with Sumitomo Metal Industries Limited (not rated). The integration was recently approved by the Japan Fair Trade Commission.

Moody's will continue to monitor the integration of NSC and Sumitomo for evidence of synergies including any enhancement of global competitiveness achieved by merging their global production systems and any increased cost competitiveness.

The primary basis for the downgrade is Moody's view that the steel industry is currently suffering from oversupply conditions in eastern Asia, a slowing of the economies emerging countries and resultant decline in demand for steel, the potential for a spillover effect from European financial crisis, etc. and in the case of NSC, the negative impact of the strength of Japanese yen. Moody's also anticipates that any benefits from declines in the price of raw materials will, in the current over supply circumstances, be passed on to customers through price reductions.

The review will focus on the impact on earnings and cash flow of the current conditions affecting the steel industry and its impact of NSC's ability to improve margins and reduce leverage. In addition, Moody's will review the implications of the now more certain integration of NSC and Sumitomo. Moody's notes that approvals have not been forthcoming from the Indian or the Chinese governments. It is possible that regulatory authorities in either of these two countries could ask for changes to the integration plan that could have a meaningful impact on its benefits.