Nippon Steel goes on offensive as Chinese industry retreats

Posted on 11 January 2018

Source: Nikkei

Japan's largest steelmaker, Nippon Steel & Sumitomo Metal, is roaring toward 72% pretax profit growth for the fiscal year ending this March, expecting to log 300 billion yen ($2.64 billion). It is churning out most of its steel products at full capacity, and prices of hot-rolled sheet -- widely used in manufacturing -- and other products are rising.

This is a dramatic turnaround for a company that was struggling mightily only a year ago, with its steel business falling into the red for the first time in four years. Still, as President Kosei Shindo maps out the midterm plan scheduled to kick off this spring, he may be wondering how much of the robust growth is due to the company's own strength, and how much stems from Chinese state policy.

Much of Nippon Steel's recovery is owed to the fact that Chinese steelmakers -- which account for half the world's crude steel production -- ceased exports of cut-rate products. "The end of China's excess production will favorably affect our industry," Shindo admitted.

In response to repeated calls from Japan, the U.S. and European countries for China to end its excess steel output, the Chinese government became serious about cutbacks in 2016. By this past June, it had fully eliminated exports of inferior-quality, illegally produced steel products known as detiaogang in Chinese.

Shindo commended the Chinese government's efforts to cut more than 200 million tons of capacity, saying, "They have lived up to the expectations of the world." He believes that current trends will "remain stable," as the Chinese economy is controlled by the government.

True strength?

Despite the upswing, Japan's biggest steelmaker is expected to fall short of targets set under its current medium-term plan, which runs through March 31.

"Regrettably, our ratio of pretax profit to sales will stay at a little more than 5% on a consolidated basis," Shindo told The Nikkei in an interview. Nippon Steel had envisioned raising the ratio to more than 10% in the final year of the current management plan, announced in March 2015.

Return on equity -- a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested -- is expected to end at around 7%, short of the more than 10% for fiscal 2017 that the current plan calls for.

"Market environments have been worse than the pessimistic cases we initially anticipated," Shindo said. 

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