Nippon Steel sees 50% profit plunge, burned by coal prices

01 November 2016

Nippon Steel & Sumitomo Metal is expected to downgrade its fiscal 2016 earnings estimate, predicting a 50% drop in group pretax profit on the skyrocketing coking coal price and a slack steel market.

Profit guidance will likely be slashed to around 100 billion yen ($950 million) — 30 billion yen less than initially forecast.

Supply of coking coal from such nations as China and Australia has been falling since July, pushing up prices. Nippon Steel has apparently contracted with a major overseas resource producer to buy coal at $200 per ton for the October-December quarter — about 2.2 times the year-earlier price. Coking coal is expected to remain pricey in the first quarter of 2017, weighing pretax profit down more than 100 billion yen compared with fiscal 2015.

The plan is to offset higher materials costs by raising prices on such products as automotive steel sheet. But clients will likely put up a fight amid uncertainty around emerging markets, hurting Nippon Steel’s profitability. Earnings for the six months through September are due out Tuesday.

Meanwhile, Japan’s JFE Holdings on Friday slashed its full-year pretax profit forecast from 65 billion yen, on par with fiscal 2015, to 30 billion yen, which amounts to a 53% year-on-year plunge. Steel operations are expected to fall into the red for the first fiscal year since the steelmaker formed in 2002. Demand for steel has weakened at home and abroad, while “strengthening in the yen is chipping away at profit,” according to Chief Financial Officer Shinichi Okada.

The surging price of coking coal “has narrowed our profit margin and made it tougher to run a sound business,” Okada said, indicating the company will likely ask customers to pay more. JFE logged an 8.4 billion yen net loss for the April-September half, down from a 29.9 billion yen profit a year earlier.

Global steel oversupply originating in China has held down product prices, hitting earnings from the other side as well. A strong yen, meanwhile, has crimped profitability for exports, completing a painful trifecta.

Source – Asia Nikkei