The agency said in its North Asian Steel Outlook 2010 report that it expects all the rated North Asian steelmakers to recover this year.

According to the report, China's rapid economic recovery has led to strong improvement in steel shipments for Chinese steelmakers.

"Strong automobile production growth in China has also benefited South Korean and Japanese steelmakers to varying degrees, with the latter seeing less benefits given the higher reliance of Japanese exporters on US demand," said Su Aik Lim, director in Fitch's Asia-Pacific corporate team.

The improved demand outlook will give a boost to plant utilization rates, leading to improved profits for North Asian steel companies.

Fitch has maintained stable credit outlooks for all North Asian steelmakers as it expects the companies' debt levels to remain stable based on the agency's assumption that capital expenditure will remain broadly at the levels seen in 2009.

"Fitch expects Chinese steel demand to grow by 5 percent to 8 percent in 2010, slowing from 19 percent in the first nine months of last year. Unless export demand for Chinese steel products starts to pick up, industry crude steel capacity will remain in excess of demand in 2010, putting pressure on steel product prices," said Lim.

Despite the industry overcapacity, Fitch-rated Chinese steel companies - Baoshan Iron and Steel Co Ltd, Angang Steel Co Limit and Wuhan Iron and Steel Co - will likely perform well as they are more exposed to high-value-added cold rolled steel products and specialty steel products, which continue to enjoy healthy demand and face capacity constraints.

"The South Korean steel sector is also likely to grow in 2010 driven by robust demand from the automobile and construction sectors, and the competitive pricing of local steel products versus imports," said Jeong Min Pak, senior director in Fitch's Asia-Pacific corporate team.

This is on the back of the already rapid recovery the sector enjoyed in late half of 2009 with Pohang Iron and Steel Co Ltd (POSCO) - the largest steelmaker - reporting a plant utilization level of 100 percent in the fourth quarter of 2009.

Fitch believes that POSCO has room to raise its product prices to offset raw material price increases in 2010, though increased industry production capacity, such as Hyundai Steel's new blast furnace, may temper potential price hikes.

In contrast, Japanese steelmakers will undergo a slower recovery than their Chinese and South Korean peers. Fitch expects their profit to remain below the peak achieved in 2007 and 2008 as they are still operating below full capacity.

The rise in exports, particularly from strong automobile demand in China, was a key driver for the recovery of Japanese steelmakers from the second half of last year. However, there are concerns that competing in export markets may deprive Japanese steelmakers of their key competitive advantage - a strong relationship with Japanese manufacturers.

Therefore, a sustainable recovery for Japanese steelmakers will have to come from a similar recovery for their traditional customers, the Japanese automakers, which account for one third of their total demand.