Prices to Stay Low Amid Competition: Nippon Steel

Nippon Steel Corp. (5401), Japan’s biggest steelmaker, expects prices to stay low this year as global producers of the metal used in cars, ships and construction continue to compete for orders amid slowing demand.

“The current situation won’t change so easily,” Executive Vice President Shinichi Taniguchi said in an interview in Tokyo. “The yen is also likely to remain high,” putting Japanese mills at a disadvantage compared with their Chinese and South Korean rivals, he said.

Nippon Steel, which relies on exports for 40 percent of its shipments, and other Japanese mills posted losses in the quarter ended December after the yen averaged 6.7 percent higher against the dollar and cooling economies in China and Europe kept overseas orders muted. Prices of benchmark hot-rolled coils may average 5 percent lower in 2012, according to calculations based on data from Steel Business Briefing in London.

“The strong yen is hitting Japanese manufacturers like a body blow,” Taniguchi said. “We expect an oversupply of steel in Korea, Japan and China.”

The yen’s strength has eroded profits at Japanese exporters such as Sharp Corp. and Honda Motor Co. as faltering global growth undermines demand. The yen averaged 77.33 per dollar in the quarter ended December compared with 82.50 a year earlier. It climbed to a post-World War II high of 75.35 Oct. 31.

“Exports won’t be profitable with the yen at current levels,” Shinya Yamada, an analyst at Credit Suisse Securities Japan Ltd., said by telephone. “The appropriate levels for Japanese steelmakers to compete with their overseas rivals would be 85 yen or lower.”

Strong Yen

Nippon Steel has slumped 34 percent in Tokyo in the past year, compared with the 26 percent drop in Baoshan Iron & Steel Co. in Shanghai and Posco (005490)’s 14 percent decline in Seoul. The Japanese steelmaker closed 2.4 percent lower at 202 yen.

Japan, the second-largest producer of the metal after China, cut exports by 4 percent in the first 11 months of 2011, according to a presentation by Nippon Steel Jan. 27. The country’s four blast-furnace steelmakers forecast second-half losses of 115 billion yen ($1.5 billion) as the yen exacerbated the slump in Asian demand, according to Bloomberg calculations based on the companies’ earnings statements.

Average product prices will fall by 5,600 yen a metric ton, or 6 percent, to about 82,000 yen a ton in the current three months, compared with the preceding quarter, Nippon Steel said in January. It cut its full-year profit forecast to break even.

Steel Merger

While Nippon Steel and its merger partner Sumitomo Metal Industries Ltd. (5405) plan to expand in emerging markets, including construction of blast furnace steel plants, they are also seeking to bolster domestic operations to help boost earnings, Taniguchi said at Nippon Steel’s headquarters.

The companies, which received approval in December to merge and create the world’s second-biggest steelmaker, said in September that the combined entity aims to save 150 billion yen annually after three years by cutting production and purchasing costs and sharing technology.

“The companies will need to meet their target faster than the current plan and create more synergies” to counter the intensifying competition, Credit Suisse’s Yamada said.

To contact the reporters on this story: Masumi Suga in Tokyo at msuga@bloomberg.net; Yasumasa Song in Tokyo at ysong9@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net.

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