JFE Holdings Inc., Japan’s second-biggest steel producer, is sticking to its forecast that prices will recover in the second half, in the belief that Chinese mills currently flooding the world market will have to cut output to stem losses.
“At issue is whether Chinese mills will continue loss-making exports,” said Koji Kakigi, president of JFE Steel Corp., the unit that drives more than 70 percent of the company’s sales. “When the market mechanism works, they will take various steps, like cutting output and lowering plant utilization rates. We anticipate such behavior will occur.”
Economy Falters
As China’s economy falters and domestic demand wanes, its steel exports are surging, on pace to reach 100 million metric tons this year. That’s about the same level as total output in Japan, the world’s No. 2 steelmaker. Net profit at medium-to-large mills in the first six months slumped 73 percent from a year earlier, according to a China Iron and Steel Association survey of its members.
Output Cuts
That means output cuts, as China’s mills adjust to withstand the prolonged slump in prices, Kakigi said Monday in an interview at the company’s Tokyo headquarters. It should aid a recovery in the half-year ending March 31 for producers competing to supply Asia.
JFE Holdings rose as much as 3.7 percent, and traded 1.7 percent higher at 1,801.0 as of 11:14 a.m. in Tokyo, paring its decline this year to 33 percent.
The gain followed China’s stimulus measures late Tuesday and heavy drops in JFE’s stock the previous two days amid concern over the outlook for the Chinese economy. An improvement in China’s economic conditions could lift domestic steel demand and thin its exports.
Macro Economy
“It depends on the Chinese macro economy,” said Shinya Yamada, a Tokyo-based analyst at Credit Suisse Group AG. “The key is whether China’s measures to prop up the economy will work. Even if China cuts steel supplies, such steps won’t help when the economy deteriorates rapidly.”
Kakigi said the company plans to produce 28 million tons of crude steel for the fiscal year, almost the same as last year and unchanged from its July forecast -- although that was made before China began devaluing its currency in August.
Kakigi said China’s devaluation equates to about $15 for hot-rolled steel. That’s less than 5 percent of the total cost per ton and doesn’t account for the higher price China is paying for raw material imports. “We don’t expect the yuan’s devaluation will give Chinese suppliers a big advantage and that our portion of exports will decline,” he said. The bigger issue is Chinese mills’ profitability.
Shed Inventory
JFE Steel plans to complete its shedding of excess inventories by the end of September and return to its usual pace of production in the second half. Japanese Prime Minister Shinzo Abe’s steps to weaken the yen and boost infrastructure spending in Japan has given JFE and its domestic peers a competitive edge over Chinese and South Korean mills, according to Kakigi.
Kakigi reiterated the company’s plan to boost annual sales by 25 percent to 40 million tons by March 2018. To meet that, it needs to expand outside its home market and follow its manufacturing customers as they build businesses overseas, he said. Domestic demand growth should wane after the 2020 Tokyo Olympics and as the population shrinks.
“Unless the company targets growth in overseas markets, we won’t be able to secure a firm position in the global steel industry,” he said. “We can’t expect growth as long as we just stay at home. It’s a choice of growth or decline.”
In addition to its recent investment in Formosa Plastics Corp.’s $10.5 billion project to build an integrated steel plant in Vietnam, JFE Steel is considering a facility in North America to make steel sheets for Japanese auto suppliers.
The steelmaker will probably make a decision on the plant by the end of the year, Kakigi said. Details, including a potential partner and the location and cost of the facility, are still being considered.
Source: Bloomberg
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