Nippon lowered FY2020 (April to March) earnings forecast for EAF-based subsidiary Osaka Steel as weak steel demand and high prices of scrap eroded the company’s profit margin. Deteriorating profit margin is likely to reduced Osaka’s consolidated ordinary profit to JPY0.0bn with net sales of JPY75bn compared to the earlier profit forecast of JPY1bn and net sales of JPY74bn announced in October.
Steel demand in Japan has dwindled due to the COVID-19 pandemic, while the prices of company key raw material steel scrap has surged impacting the business environment significantly, stated the company’s release on Thursday. Nippon expects sales and profit to decrease compared to the prior year.
Japanese EAF steelmakers are also facing power outages, which is restricting their operating capacity. Cold spells have increase energy demand for heating purposes, while limited nuclear power generation has pressured the country’s thermal power generators amid LNG shortage.
On a non-consolidated basis, Osaka’s FY2020 net sales is expected to fall by 11.5pc to JPY52bn compared to JPY58.77bn in the prior year. While ordinary profit is likely to decline by 80pc to JPY1.3bn from 6.74bn a year ago.
Japanese Fe scrap market
Much of the support for Japanese ferrous scrap prices is stemming from increased Chinese interest in Japanese scrap. Japan being China’s most preferred trade partner enjoys import tax discounts in addition to shorter transit period for seaborne imports compared to other scrap exporting countries like the US and Australia.
Chinese buyers have been actively enquiring for scrap from Japan and other destinations. China lifted the curb on iron and steel scrap import from Jan 1, leading to a couple of deals for Japanese scrap in early January. But exporters experienced delays in the documentation and stringent quality checks at Chinese ports, which slowed trades during the last two weeks.
In the last couple of weeks, Japanese ferrous scrap prices have cooled-off amid sluggish steel demand and lower bids by mills. Following Tokyo Steel’s lead, Taiwanese and South Korean steelmakers have also cut scrap purchase prices. On Thursday, Tokyo Steel lowered domestic #2 HMS purchase prices by JPY3,000/mt ($28.7/mt) to JPY29,000/mt del plant Utsunomiya, effective Jan 29 while bids for other plants were raised by JPY1,000 to 1,500/mt on Wednesday. This was seventh successive price cut by Tokyo Steel in January.
On Wednesday, #2 HMS offers to China were lower by $50-60/mt from prior deals at $450-460/mt cfr Shanghai, while bids were at $440-450/mt. Offers for Japanese HS scrap fell by $50/mt from the last deal heard to $500/mt cfr Shanghai.
A bulk deal for US-origin shredded concluded at $430/mt cfr China on Tuesday. Chinese importers also bought containerized scrap from South America.
($1 = JPY104)
Market participants believe the decline in Japanese scrap prices could be short-lived. Most expects prices to recovery in February amid tighter supplies and increased steel demand post the Chinese Lunar New Year holidays.