TOKYO (Reuters) - Japan’s top steelmaker Nippon Steel Corp (5401.T) on Thursday forecast a 56% drop in business profit in the year through March 2020, as surging iron ore prices and slumping demand in Asia erode its margins.
Business profit, which is operating profit excluding one-off gains or losses, at the world’s No.3 steelmaker was forecast at 150 billion yen ($1.4 billion), down from 336.9 billion yen a year earlier.
The company has been struggling with rising costs, especially with prices of iron ore, the key steelmaking ingredient, more than doubling since the start of 2019.
Iron ore futures DCIOcv1 on the Dalian Commodity Exchange hit their highest in more than five years on Wednesday, as investors bet that a supply crunch, led by reduced output following a Vale (VALE3.SA) dam accident in Brazil and a cyclone in Australia, will linger beyond 2019.
“The iron ore market’s rally was triggered by Vale’s accident, but is now bolstered by strong demand from China,” Nippon Steel Executive Vice President Katsuhiro Miyamoto told a news conference.
“Steel markets have been falling due to weaker demand, hit by the prolonged U.S.-China trade war, but materials markets have been rallying on the back of China’s economic stimulus,” Miyamoto said. “This is a new form of China risk.”
The most-active construction steel rebar contract SRBcv1 on the Shanghai Futures Exchange sank on Thursday to its lowest since June 24, pressured by expectations that stockpiles in the world’s biggest producer China will rise further, while domestic demand remains weak.
“We will need to raise prices of our products for industrial customers to meet surging costs,” Miyamoto said, pointing also to higher costs of secondary materials and distribution.
For the year through March, it plans to produce 41 million tonnes of crude steel, flat from a year earlier.
Nippon Steel is changing its focus to profitable output from full-capacity output, Miyamoto said.
For the April-June quarter, the group booked a 33 percent drop in business profit to 60.6 billion yen, versus 90.6 billion yen a year earlier.
Faced with slumping earnings, the Tokyo-based company plans to make 200 billion yen worth of asset disposals or more by March 2021, in addition to planned disposals totalling 100 billion yen .
The world’s biggest steelmaker ArcelorMittal (MT.AS) on Thursday said it had identified up to $2 billion of assets for potential sale in the next two years.
Reporting by Yuka Obayashi; Editing by David Holmes