Posted on 30 Sep 2015
Moody’s Japan K.K. says that the country’s two largest steel makers by output — NIPPON STEEL & SUMITOMO METAL CORPORATION (NSSM, A3 stable) and JFE Holdings, Inc. (JFE, Baa1 stable) — will maintain their credit quality over the next 12-18 months, because the ongoing weakness of the yen and cost cutting efforts by the companies will partially offset the negative impact of poor business conditions in Asia.
“We expect that NSSM and JFE will maintain financial profiles appropriate for their rating categories, given their moves to lower their debt levels over the past two years,” says Takashi Akimoto, a Moody’s Analyst.
“During the October-December 2015 quarter, domestic inventory volumes will normalize, and a balance will be achieved between the levels of supply and demand in the domestic market,” adds Akimoto. “However, the weakening Chinese economy will weigh on steel prices and the profit margins of Japanese steel majors.”
Moody’s analysis is contained in its just-released report titled “Steel – Japan: Credit Quality Stable Despite Poor Market Conditions,” and is authored by Akimoto.
Moody’s report explains that the business environment for Japanese steel companies has deteriorated because of the following factors: 1) high inventory volumes in the domestic steel market; 2) overproduction in China and a supply-demand imbalance in Asian steel markets; 3) weak demand for high-margin oil country tubular goods, because of the fall in oil prices; and 4) valuation losses from the fall in raw material prices.
Nevertheless, the ongoing weakness of the yen supports the steel majors’ competitiveness in both the domestic and overseas markets; partially mitigating the negative impact from oversupply in Asian steel markets.
Moody’s also expects that the companies will benefit from cost-cutting efforts associated with the recent upgrading of domestic production facilities.
Moreover, while the steel majors will increase investments in maintaining and upgrading their domestic facilities and expanding overseas, these investments will be funded with operating cash flow. Moody’s therefore does not expect the companies to report a significant deterioration in their financial positions, due to higher debt levels.
As for their debt reduction efforts, the steel majors’ focus on debt reduction over the past two years has led to the recovery in their profitability and cashflow generation.
On the effects of China’s slowing economy and overproduction of steel, Moody’s points out that while these two factors will pressure steel makers in Japan, according to the Japan Iron and Steel Federation only 14% of exported steel products by volume went to China during the fiscal year ended 31 March 2015.
In addition, Japan’s main exports to China and Asia are high-quality steel. Such products are less vulnerable to price wars that affect low-end products.
Nonetheless, a deterioration in the global market for steel will result in lower prices and tightened margins for Japan’s high-quality steel products.
