Weak recovery likely for steel cos, India a bright spot

TOKYO:¬†Asia’s major steel companies are likely to show that the January-March quarter was their low point but a robust recovery is not on the cards as China continues to ramp up output amid slowing demand.

The euro zone debt crisis and tight credit conditions in China, the world’s biggest steel consumer and producer, cut steel demand and squeezed margins despite falls in raw material costs, prompting South Korea’s POSCO, Asia’s most profitable steelmaker, to describe the quarter as the most difficult earnings period.

Earnings at Japanese mills, led by Nippon Steel and JFE, are seen plunging to their worst levels since early 2009 after the Lehman crisis, while profit at POSCO, the world’s third-biggest steelmaker, is seen cut in half.

In China, which produces around half of the world’s steel, the sector tumbled into a loss of about 1 billion yuan ($158.69 million) in the first quarter from a profit of 25.8 billion yuan a year ago, an official with the China Iron & Steel Association said on Wednesday.

Price improvements in China have been small in March and April, when prices normally pick up as construction recovers from the winter lull, analysts say.

China’s demand continues to slow and we haven’t seen a robust improvement as we usually see at this time of the year, said Jeremie Capron, a Singapore-based analyst at brokerage CLSA.

The worst was probably January-March, but I don’t think we see a significant improvement in the current quarter.

Chinese steelmakers are boosting production, with the country’s crude steel output hitting a record 61.58 million tonnes in March, as mills aggressively responded to small price rises, while the economy grew at its slowest pace in nearly three years in the first three months of 2012.

JFE Holdings Inc, the parent of the world’s No.5 steelmaker JFE Steel, and POSCO report earnings on Friday, among the first Asian producers to do so.

YEN IMPACT ON JFE, NIPPON

The lacklustre steel market in Asia bodes ill for Nippon Steel, the world’s No. 4 steelmaker, and JFE, which are seen selling more than half of their volume outside Japan.

Still, the yen’s easing to 80 against the US dollar from a record high of 75.7 in October and a recovery of domestic auto output after the massive earthquake in 2011 would mean a small improvement in their results compared to their own forecasts.

A stock market recovery led Nippon Steel to review its equity write-off of 89 billion yen ($1.11 billion), raising its bottom line.

Shares in Nippon Steel have risen 8.3 percent since the start of this year and JFE by 16 percent as the yen’s relative weakness cheered investors, compared to POSCO’s 0.3 percent gain.

Both the Japanese firms are expected to skip issuance of earnings forecasts for the new 2012/13 financial year started April 1, ahead of tough talks with large domestic customers such as automakers on price cuts for the April-September first-half.

Hurt by weak demand and prices, POSCO, which is backed by billionaire investor Warren Buffett, is likely to report profit about half that of a year ago, although it says it sees bright signs.

The global steel market seems to have hit the bottom after a series of falls in steel prices halted in China, Hwang Eun-yeon, POSCO’s chief marketing officer, told Reuters last month, adding the company was considering reducing price discounts as the recovery takes hold.

Park Hyun-wook, an analyst at Hi Investment & Securities, however, expects POSCO’s second-quarter results to fall short of its normal level of 1 trillion won, with China demand recovery seen sluggish, especially from the construction and automotive sectors.

INDIA A BRIGHT SPOT

Some other analysts were also sceptical of an early demand recovery in China.

The steel market fundamentals haven’t largely improved yet as demand from property, machinery and auto sectors remains low, Yang Baofeng, a steel analyst with Orient Securities, said in a research note.

Kazuhiro Harada, analyst at SMBC Nikko Securities in Tokyo, said he expects the Chinese government to announce an economic stimulus package in the first half of this year, boosting demand.

A small bright spot is India, where easing raw materials costs and a cut in interest rates this week could boost margins in coming quarters although uncertainty about demand continues to be an overhang.

Among the top local producers, Steel Authority of India Ltd and JSW Steel may see an improvement in margins.

Tata Steel, the world’s No. 7 steelmaker, is forecast to report a nearly two-thirds fall in January-March profit, mainly due to weak prices and tepid demand at European unit Corus, which accounts for most of its global capacity of 28 million tonnes.

[Source – Financial Express]


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