Japan steel firms cut outlook as market worsens

TOKYO Wed Oct 26, 2011 6:04am EDT

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TOKYO (Reuters) - Japan's top steelmakers, Nippon Steel Corp (5401.T) and JFE Holdings Inc (5411.T), slashed their full-year profit outlooks by about 20 percent on Wednesday, hit by a rapid deterioration in Asia's steel market after booking quarterly earnings about half of last year's levels.

Ebbing demand in China, the world's biggest consumer and producer, and an uncertain global economy, are weighing heavily on the profits of Asian steelmakers already reeling from a supply glut and sagging regional prices.

Japanese steelmakers, heavily exposed to Asia's steel market, face an even tougher outlook due to a strong yen and prices that are expected to fall further in the export market.

The glum outlook follows POSCO's (005490.KS) announcement last week that the South Korean steelmaker will cut its 2011 investment plan and its October-December operating profit may fall.

Nippon Steel, the world's No.4 steelmaker, slashed its outlook for recurring profit for the year to March 2012 to 180 billion yen ($2.38 billion) from its projection of 230 billion yen only three months ago.

That compares with an average estimate of 206.8 billion yen in a poll of 18 analysts by Thomson Reuters I/B/E/S.

JFE, the world's No.5, also cut its full-year profit forecast to 100 billion yen from its July estimate of a 130 billion yen profit. The estimate is below analysts' consensus of

121 billion yen profit and would mark a 40 percent drop from a year ago.

The two firms' July-September profit fell about 50 percent from a year earlier as a strong yen and weak demand in Asia squeezed margins on exports.

Nippon Steel shares closed down 2.4 percent at 204 yen after the results, but JFE finished up 4.4 percent at 1,459 yen.

"JFE's new earnings outlook now appears to fully reflect the deteriorating environment, giving a relief to investors, but Nippon Steel's outlook is still not bad enough," said Takashi Aoki, vice president of equity investment at Mizuho Asset Management.

Falling prices of spot iron ore will ease cost pressure but analysts caution that steel prices may fall more sharply than the cost of iron ore, as steelmakers negotiate their purchase of the key steelmaking ingredient on a quarterly basis.

Steelmakers have yet to fully pass on higher iron ore costs incurred early this year and will face vocal calls from carmakers and other customers for large price cuts as raw material prices fall, analysts said.

Spot iron ore prices slumped 7.2 percent on Tuesday, the steepest decline ever on weak demand from China, where slower growth has dented steel consumption. Iron ore prices have fallen 20 percent since early September.

(Editing by Joseph Radford, Vinu Pilakkott and Matt Driskill)

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