Nippon Steel Plans Purchase, Stock Buyback to Weather Slump

  • World's No. 2 mill cuts profit forecast by over a fifth
  • ``We intend to do whatever is necessary'' executive says

Nippon Steel & Sumitomo Metal Corp. cut its full-year profit forecast by more than a fifth, announced a stock buyback and said it’s in talks to take control of domestic partner Nisshin Steel Co. The shares jumped.

The world’s second-biggest mill reduced its net income forecast for the year to March by 22 percent to 140 billion yen ($1.16 billion), while saying it planned to buy back as much as 4.3 percent of its shares for up to 100 billion yen. The company will enter discussions to make Nisshin a subsidiary by March 2017, potentially raising its minority holding.

The global steel industry is in crisis as it contends with a glut spurred by China’s slowdown that’s boosted competition, dragged prices lower and crushed profit margins. The sector is in a worrying state, according to Germany’s largest mill, Thyssenkrupp AG, while last week JFE Holdings Inc., Japan’s No. 2 producer, cut its full-year profit forecast for the second time in three months and South Korea’s Posco reported its smallest ever annual profit.

“Low price levels will continue for a while,” Nippon Steel’s Executive Vice President Katsuhiko Ota said at a briefing in Tokyo. “We intend to do whatever is necessary.” He added that prices probably won’t keep dropping although a V-shaped recovery is unlikely.

Nisshin Listing

Nippon Steel -- which has an 8.31 percent stake in Nisshin, according to data compiled by Bloomberg -- plans to keep Nisshin listed, and is considering raising its stake to as much as 66 percent, possibly via a tender. The Asahi newspaper reported earlier Monday the value of the purchase may surpass 100 billion yen, without saying where it obtained the information. As of Friday’s close, Nisshin’s market value was 144 billion yen.

Nippon Steel rallied as much as 11 percent in Tokyo to 2,360 yen, before paring gains to 2,347 yen. Shares in Nisshin, Japan’s fourth-biggest mill, climbed as much as 23 percent, the most since October 2012.

Nippon Steel reported an 11 percent slide in sales and a 42 percent drop in operating profit for the nine months to December, compared to the year-ago period, although its net income was flat at 153 billion yen. It forecast the fourth quarter will see a 13 billion yen net loss. Nisshin Steel reported zero net income over the nine months and slashed its full-year estimate by 94 percent to 1 billion yen.

Japanese Consolidation

A combination of Nippon and Nisshin would leave Japan with three blast-furnace steelmakers that use iron ore and coking coal as key raw materials, together with JFE and Kobe Steel Ltd. The nation had six blast-furnace steelmakers in 2000.

Nippon Steel & Sumitomo was created in 2012, when Nippon Steel Corp. and Sumitomo Metal Industries Ltd. merged to combat competition from cheaper and faster-growing Asian suppliers. JFE was formed in 2002 by the merger of Kawasaki Steel Corp. and NKK Corp.

In a separate announcement, Vallourec SA, which supplies steel to the oil and gas industry, said it plans to raise 1 billion euros ($1.1 billion) to fund its restructuring, in a deal that could leave Nippon Steel with 15 percent of the French company.

Vallourec has a market value of 550 million euros and Nippon already has a small stake in the company, according to data compiled by Bloomberg, while the two are partners in North America and Brazil.

Before it's here, it's on the Bloomberg Terminal.