Ratings agency Moody's on Monday said it had downgraded major Japanese steel companies Nippon Steel and JFE Holdings on concerns over their profitability in the face of rising raw material prices.

Moody's Japan K.K., the Japanese unit of the US ratings firm, downgraded the senior unsecured debt ratings of Japan's biggest steelmaker Nippon Steel and JFE Holdings by one notch to A2 and A3 respectively, with a stable outlook.

Moody's said the downgrade was due to concerns that the companies will be unable to improve profitability and leverage "given rising raw material prices and the difficulty of passing on higher costs to customers."

Nippon Steel's new rating is 6th on a scale of 19, while JFE's is 7th.

Iron ore and coking coal, the two main raw materials for steel production, have seen significant price rises in recent years in a market dominated by the three global mining giants, Anglo-Australian BHP Billiton, Rio Tinto and Brazil's Vale.

Moody's said the Japanese firms will take a hit in the current financial year to March 2012 because of the negative impact of the March 11 earthquake and tsunami on Japan's economy, despite an expected second half recovery.

Domestic steel demand in the fiscal year will be sluggish as its major customers, such as the auto industry, have been badly affected by the aftermath of the earthquake, Moody's said.

"Although demand in the construction sector will be strong -- because of rebuilding -- it may not fully offset the negative impact of other sectors on its profitability."

In addition, Moody's warned that "the profitability of exports remains weak, primarily because of weak product prices, reflecting in turn the glut in the Asian steel market".

Tokyo-headquartered Nippon Steel Corporation, produces high-quality steel for use in a variety of industries globally, with the automotive industry being a key customer.

In February Nippon Steel and third-ranked rival Sumitomo Metal Industries said they would work towards a merger that would create the world's second-largest steel firm by 2012.

JFE Holdings, Inc., also headquartered in Tokyo, is a pure holding company with shares in operating subsidiaries with steel, engineering and shipbuilding, Its steel segment is the company's core segment, accounting for the bulk of sales.

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