Japan Steel Makers Set To Pass On Higher Cost To Users
(This item first ran at 1011 GMT.)
Thursday February 24, 5:56 AM
By Kazuhiro Shimamura
Of DOW JONES NEWSWIRES
TOKYO (Dow Jones)--Japanese steel makers are facing huge hikes in raw materials prices, but it's their customers - automakers and shipbuilders - who are most likely to suffer, analysts say.
Nippon Steel Corp. (5401.TO), Japan's top steel maker, has just agreed to pay 71.5% more for iron ore from major producers in Brazil and Australia in the fiscal year starting April 1. That follows Japanese steel firms agreeing to a rise of more than 50% in coal prices late last year as robust steel consumption, particularly in China, keeps global steel supplies very tight.
But analysts point out that automakers and shipbuilders in Japan have nowhere else to go for the type of high-grade steel sheet and plate they need for their products, so ultimately they'll be the ones who foot the bill.
"Nothing will change the pattern of steel makers passing on the increased raw materials costs to their product prices," Daiwa Institute of Research's analyst Takashi Murata said.
Furthermore, stock investors may be misjudging the situation.
Concerns over soaring iron ore prices hit major steel maker shares Wednesday on the Tokyo Stock Exchange, but these issues are too low in view of the continued double-digit growth in their profits next fiscal year, Murata said.
On Wednesday, Nippon Steel shares fell 2.5% to Y270 and JFE Holdings Inc. (5411.TO) skidded 3.4% to Y2,965.
But an analyst at a foreign investment bank in Tokyo said there is no reason to expect a fallback in their share prices in the mid- to long-term. Nippon Steel and JFE's share price/earnings ratios have been hovering near 10, which is "incredibly cheap on a valuation basis," the analyst said.
Steel Cos Hold Aces In Talks With Auto, Ship Makers
As steel makers conclude their negotiations with raw materials suppliers, they will begin full-fledged talks with their major customers.
For the steel firms, the rise in coal and iron ore prices means their production costs will increase by more than $150 per ton next fiscal year. But analysts agree that the steel companies should have no problem in passing on that huge rise.
For Nippon Steel, the average price of its steel products was Y63,000 a ton in the October-December quarter, up from Y50,600 in the previous fiscal year.
Daiwa's Murata says the tight supply situation means Nippon Steel, JFE and other blast furnace operators should be able to fully pass on the cost increase.
"Steel companies negotiate over their raw materials prices just once a year, but for their steel products, they have been able to raise prices gradually through the year," he says.
Nippon Steel said Tuesday it has agreed to a 71.5% hike in the price it pays for iron ore from Companhia Vale do Rio Doce SA (RIO).
That effectively sets a benchmark for talks between Japanese steel makers and iron ore suppliers worldwide. Rio Tinto Ltd. (RTP) of Australia then said Wednesday it has also agreed with Nippon Steel to raise its iron ore price by 71.5%. A JFE spokesman added that his firm has accepted the same level of price hikes from the two overseas suppliers.
"It may have benefited the Japanese steel mills to settle a price now, rather than hold on for longer given that price expectations were continually being increased," said Glyn Lawcock, an analyst with UBS in Australia.
Nippon Steel, JFE and other blast furnace operators declined to comment on the prospects for their price talks with customers, but they plan to meet the press in the first week of March to discuss their business outlook.
Automakers such as Toyota Motor Corp. (7203.TO) have said they will try to offset the increase in their steel sheet costs by slashing other production costs to avoid raising vehicle prices and risking a loss of market share.
The impact may be larger on shipbuilders. Analysts say shipbuilders have less room for cost cutting, while stiff global competition prevents them from passing all their cost increases along to their product prices.
-Kazuhiro Shimamura, Dow Jones Newswires; 813-5255-2929; kazuhiro.shimamura@dowjones.com (Stephen Bell contributed to this article.)
-Edited by Hugh Lawson
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