Tokyo and Hong Kong - There’s trouble in steel town. Asia’s largest mill forecast the first drop in full-year earnings in three years, hours after Pittsburgh-based US Steel reported a quarterly loss, adding to signs producers are facing challenges from lower prices and record Chinese exports.
Profit would probably decline 18 percent to ¥370 billion (R38bn) in the year to March, Japan’s Nippon Steel & Sumitomo Metal said on Wednesday, warning of the impact of China’s deceleration. Fiscal first-quarter operating profit and sales dropped and the Tokyo-based company will reduce output.
Steelmakers worldwide are grappling with the consequences of China’s slowdown, which has spurred mills in the top producer to boost overseas sales as local demand growth stalls for the first time in a generation.
That’s boosted competition from Asia to the US and South Africa, and helped to trigger lower prices.
The global industry is reeling under the impact of exports from China, according to Sajjan Jindal, the chairman of JSW Steel, India’s third-largest producer.
Chinese glut
“Steelmakers in China have little alternative except to export and that’s having an impact on margins for regional exporters and the Japanese mills,” said Daniel Kang, an analyst at JPMorgan Chase in Hong Kong.
“Chinese exports are crowding out other regional suppliers from South Korea and Japan, particularly in markets like south-east Asia.”
Nippon Steel said first-quarter net income rose 51 percent to ¥72.7bn, boosted by a weaker yen and a one-time gain, while revenue and operating profit slipped 7 percent and 12 percent, respectively.
In the first half, crude-steel output will be cut to 21.2 million tons from 22.9 million tons to shed inventory on a delayed recovery in auto demand.
“China’s economic slowdown became more apparent and growth in steel demand continued to decelerate in other emerging countries,” Nippon Steel said.
“In international steel markets, a downtrend continued. In addition to a decline in primary raw materials, supply pressure from Chinese and South Korean steelmakers remained strong.”
Prices in decline
Prices are in retreat as China’s mills put more products on the boat.
The average US price of hot-rolled coil, used in everything from buildings to cars, tumbled 33 percent to $456 (R5 815) a ton in the second quarter, according to The Steel Index.
In China, rebar sank to the lowest level since 2003 this month.
JSW Steel swung to a 1.07 billion-rupee (R212 million) loss in the first quarter ended June 30, compared with a profit of 6.56 billion rupees a year earlier, as cheap imports from China and a decline in domestic demand trimmed margins.
“Chinese steel is flowing into the North Asian markets,” Naoto Umehara, the executive vice-president of Kobe Steel, told reporters in Tokyo on Tuesday.
“That’s pushing down hot-rolled coil, a typical example of general commercial steel products, and that’s also pushing down the overall market prices. In that sense, the damage is big.”
South Korea’s Posco, the world’s fifth-largest producer, reported a slump in profit earlier this month and announced plans to cut staff and refocus on its main business.
Shares traded this week at the lowest in a decade.
US Steel said that the net loss widened to $1.79 a share in the second quarter compared with 12 cents a year earlier.
Excluding one-time items, the loss per share was 79c.
Sales fell to $2.9bn from $4.4bn.
Conditions were challenging, US Steel president and chief executive Mario Longhi said, citing depressed volumes and low prices.
There was also a high level of imports, Longhi said.
Stock in US Steel is 36 percent lower over the past 12 months.
Steel exports from China surged 28 percent to 52.4 million tons in the first half, according to customs data.
The country is the world’s top steelmaker, accounting for about half of global production.
Overseas sales from China have risen to extraordinary levels, according to Credit Suisse Group.
“The outlook for overseas steel demand is becoming increasingly uncertain,” Nippon Steel said.
A sharp contraction in energy-sector activity, caused by the depressed oil market, was also likely to have some effect, it said.
Masumi Suga and Martin Ritchie for Bloomberg