Tokyo: Nippon Steel Corp, the world’s No.2 steelmill, booked a weaker-than-expected quarterly profit and for the first time failed to give an annual forecast amid uncertainties over raw material costs and steel prices.
The absence of an annual forecast underscores an increasingly volatile market environment for Japan’s top mill, which had sought to stabilise earnings by shifting focus to high-end sheet steel.
Japan’s two leading mills are expected to push up profits this year to around 50-55% of their peak levels in 2005-06 as output recovered to 90% capacity. But rising costs and concerns over lower profit margins cloud the earnings outlook.
Minoru Matsuno, president of Value Search Asset Management, said Nippon Steel shares are at a “very attractive” level despite uncertainties such as ongoing price negotiations with suppliers and clients.
“I see continued strong demand from Asian countries and even if steel material prices rise further, Nippon Steel will be able to pass these through to product prices,” he said.
Nippon Steel and JFE Holdings Inc, the world’s No.6 steelmaker, have agreed with Brazil’s Vale SA to pay nearly double for iron ore imports as they move to a quarterly pricing system from annual pricing.
The Japanese are still in talks with BHP Billiton and Rio Tinto, the two other major iron ore suppliers.
A shift to quarterly pricing after decades of setting annual benchmarks could make it difficult for steelmakers to fully pass on costs to customers. But Value Search’s Matsuno was still optimistic about the outlook.
“Their business strategy of selling higher-end products is no longer seen as unique because other Asian companies are also following suit,” he said. “But Nippon Steel still has a strong advantage in that market.”
Nippon Steel said its quarterly profit swung to a recurring profit -- before tax and one-offs -- of ¥55.5 billion ($596 million) from a loss of ¥74.3 billion a year earlier.
That fell short of two analysts’ consensus for ¥58.1 billion on Thomson Reuters.
For the year to March 2011, Nippon Steel is expected to book a recurring profit of ¥308.7 billion, according to a poll of 20 analysts. The company posted an ¥11.8 billion profit in the just-ended year.
Japanese mills’ profits sagged last year as demand from carmakers slumped and competition among five Japanese blast furnace steelmills intensified on weak domestic demand. This resulted in higher stocks of expensive raw materials and products than Asian rivals, triggering huge inventory write-offs.
Nippon Steel said it expects crude steel output of 8 million tonnes on a quarterly basis in the financial year to March 2011, while the blast furnace problems it has had in Japan would lower its first-quarter profit by ¥17 billion.
Shares of Nippon Steel are down 8.3% this year, underperforming the Nikkei average’s 5.4% gain.
After the results were announced, Nippon Steel shares were down 2% at ¥340, unchanged from the pre-announcement level.