Posted on 03 Oct 2015
Kobe Steel, Japan's leading steelmaker, is being hit hard by the economic slowdown in China. The company said Monday that its group pretax profit will decline 36% to 65 billion yen ($537 million) in the current fiscal year ending March 2016, down 30 billion yen from its initial projection.
One major market concern is that earnings at the company's construction machinery unit may decline further, according to a representative of a Japanese brokerage. Kobe Steel cut its pretax profit projection in the construction machinery unit in half from 20 billion yen to 10 billion yen in late July.
The company has not disclosed profit and loss of each business unit this time, but appears to have lowered its profit projection in the construction machinery segment to about 3 billion yen. There is no sign of a pickup in demand for hydraulic shovels, as large investment in large-scale infrastructure -- such as mine development and roads -- has been sluggish in China.
The company's core steel unit is another source of worry. Of the 800 million tons of crude steel produced in China, about 100 million tons are expected to be shipped to Southeast Asia and other countries, as domestic steel demand remains sluggish.
The loose supply-demand balance has pushed down prices for hot coil to as low as around $300 per ton in Asia. "Prices appear to have fallen to levels where steelmakers can just barely manage to reap profits," an industry insider said. Due to the influx of Chinese steel, even industry giants like Kobe Steel have found it increasingly difficult to make a profit from exports.
A steel glut
Before the 2008 global financial crisis erupted, Kobe Steel and other Japanese steelmakers had reaped large profits from hefty steel demand in China. However, the supply-demand structure has changed significantly as China has substantially increased its steel production. Even Kobe Steel, which has a relatively low export ratio of 30% among blast furnace makers, has been affected by worsening market conditions.
The company has set its sights on a record 200 billion yen in pretax profit by around 2020. It reported a record 183.2 billion yen in pretax profit in fiscal 2006 ended March 2007. Up to now, Hiroya Kawasaki, who became president and CEO in 2013, has presented a growth scenario centering on the suspension of operations of blast furnaces at its Kobe Works steel mill in the city of Kobe and the expansion of its power supply business. Market players have responded favorably to some degree.
But things have changed dramatically over the past few months. A rapid worsening of earnings may prompt Kobe Steel to revise its medium- and long-term profit plan. This fiscal year, Kobe Steel is supposed to formulate a medium-term management plan, which is to start next fiscal year. With a plan to upgrade the blast furnaces at its Kakogawa Works next fall, the company's performance could remain lackluster.
With its performance at a plateau, the company may be required to draw up a more far-reaching strategy, possibly including the reorganization of its aluminum business, which delivers strong results supplying materials for automobiles.
