Japan's steelmakers raise profit forecasts, see weaker pipe orders ahead

[TOKYO] Japan's top 3 steelmakers raised their profit forecasts for the 2014 business year to end-March, helped by a weaker yen and solid local demand, but expect slumping oil prices to hit pipe orders in 2015, which may weigh on their earnings.

Nippon Steel & Sumitomo Japan's biggest steelmaker, lifted its prediction for recurring profit in the current business year by 3 per cent to 410 billion yen (US$3.49 billion), citing a higher margin in its mainstay steel business.

JFE Holdings, the nation's No 2 steelmaker, revised up its annual profit estimate by 10 per cent last week while Kobe Steel increased its guidance by 6 per cent on Tuesday.

The healthy earnings come despite a weakening steel market in the rest of Asia where massive exports from China have driven down prices, and as the yen's decline and solid domestic demand for infrastructure and shipbuilding have lent support.

But this trend may change in the next business year as oil's plunge hurts orders for pipes used in energy projects, especially for Nippon Steel, whose seamless pipes used in oil rigs and line pipes, generated 20 per cent of profit this year.

"Nippon Steel's sales volume of seamless pipes may drop 20 per cent next business year and cut its profit by 20-30 billion yen," UBS senior analyst Atsushi Yamaguchi said.

"It's different from the global financial crisis in 2008 when overall economic activities suddenly slumped. But the latest oil plunge may affect their pipe business slowly and gradually."

Global oil prices have tumbled over 50 per cent since June, forcing a number of oil and gas companies to scale back capital spending plans for 2015.

That has already battered Nippon Steel, which was forced to take a 69 billion yen charge in the April-December period as falling oil dented profits at its pipe affiliate in Brazil.

"Our orders of oil pipes are down 20-30 per cent after oil prices have dipped below US$50," Shinya Higuchi, Executive Vice President at Nippon Steel, told reporters on Tuesday. "They will come back once the prices recover US$55-65," he said.

JFE Executive Vice President Shinichi Okada said the company expects a big drop in oil pipe orders next business year, but that will have a limited impact on its earnings as pipe sales account for only 4 per cent of its steel sales.

Kobe Steel, meanwhile, expects an indirect impact as it only supplies steel plates to line pipe makers, Senior Managing Director Naoto Umehara said.

"We also expect a benefit from a boost in economy of oil-consuming countries, driven by cheaper oil," he said.

REUTERS