Posted on 22 Apr 2016
Japanese steel manufacturers are raising their prices despite sluggish demand at home. Whether their customers will fork out more money, however, remains to be seen.
The seemingly contradictory move is attributed mainly to a rise in prices of iron scrap, a key raw material for making the metal. Prices of iron ore and coking coal -- also raw materials -- are rising as well. That is a rough trend to confront when demand is limp. Japanese blast furnace steelmakers are in a similar bind.
[PICTURE1]
Domestic crude steel output fell 6.8% on the year to 8.65 million tons in March, marking the 19th straight month of decline, according to data released Wednesday by the Japan Iron and Steel Federation. That is the second-longest slump in the postwar period, matching the one that extended through June 1999 on the heels of the Asian financial crisis and nearing the 24-month streak that came when the yen strengthened in the wake of the 1985 Plaza Accord.
In mid-April, Nippon Steel & Sumitomo Metal trimmed output at H-beam lines at its Kashima Works in Ibaraki Prefecture, northeast of Tokyo, said a company official. H-beams are mainly used in building construction and civil engineering works.
Other steel products are also being affected. In March, output of steel sheet -- used in cars and home electronics -- and steel plate -- used for shipbuilding -- dropped by 6-7% on the year nationwide.
China glut
Behind those declines are Chinese steelmakers, which have flooded international markets with their products. China accounts for about 50% of global crude steel production. Steelmakers there have been aggressively ramping up exports due to shrinking domestic demand.
Although they have begun to curb production recently, Japanese makers have yet to feel the effects, said a JISF official. What have started registering the effects, though, are prices of coking coal and other materials. Those prices have been on the upswing since the start of the year on market expectations that Chinese production cuts will tighten the steel supply-demand balance.
While Japanese steelmakers welcome the news from China, they are now saddled with the problem of rising material prices and tepid demand.
On Monday, Tokyo Steel Manufacturing announced its decision to hike the prices of its construction and all other steel products from May. Major electric furnace steelmaker Kyoei Steel, whose largest shareholder is Nippon Steel & Sumitomo Metal, followed suit the next day.
Driving those decisions is the need to "pass on soaring iron scrap prices to products," said Nobuaki Nara, director at Tokyo Steel. Not too long ago, iron scrap prices were at historically low levels, but they have jumped over 40% since the start of this year.
Blast furnace steelmakers are feeling similar pressure. Nippon Steel & Sumitomo Metal and JFE Steel have agreed with leading foreign resources companies to pay higher prices for coking coal for the April to June quarter, in what is the first increase in two and a half years. Those steelmakers will likely be seeking to pass on the higher costs to their steel sheet products for large-lot customers, including automakers and electronics makers.
Grim prospects
In mid-April, the World Steel Association cut its forecast for 2016 global steel demand by 0.8% on the year, a sharp reversal from its previous expectation of an increase. "Even though prices seem to have bottomed out in markets, there appears to be no strong recovery in final demand," said Atsushi Yamaguchi, a senior analyst at UBS Securities Japan.
An official at JISF said Japanese demand for crude steel will likely pick up in fiscal 2016, but overseas demand will continue to see downside risks.
That could make it hard for Japanese steelmakers to smoothly push ahead with price increases.
