Steel demand in Japan will fall short of expectations as political wrangling holds up cash injections after a devastating March 11 earthquake and tsunami, while the construction sector is battling a deep slump, hobbled by a strengthening yen.
Japan’s construction steel sector has shrunk nearly in half over the past two decades, and the absence of large additional demand amid weak prices will further dent prospects, speeding a revamp of giants such as Nippon Steel Corp and JFE. The reconstruction bill after the magnitude 9.0 earthquake and ensuing tsunami, which devastated fishing and farming villages in northeast Japan and caused the world’s worst nuclear crisis in 25 years, runs to $220 billion.
The government has said it would spend 19 trillion yen ($250 billion) over the next five years, but analysts have warned a political deadlock could frustrate efforts to push reconstruction into higher gear. “The magnitude of the demand increase from reconstruction will be ultimately disappointing this time due to a delay in government spending,” Credit Suisse analyst Shinya Yamada said. “Demand will be too little and too late, not enough to give a decent boost to a long-term decline in domestic demand.”
Some steel industry officials had estimated the world’s costliest natural disaster would swell the need for construction steel by 50 to 80 per cent over the 3 million tonnes of new demand triggered by the 7.3-magnitude Kobe earthquake in 1995. But more recently analysts have been slashing forecasts for additional demand for products such as rebar and shaped steel.
DELAY IN RECONSTRUCTION DEMAND:
Many analysts had estimated the volume of reconstruction demand at 3 million to 4 million tonnes over three years starting next year, but now they say that will be substantially delayed. Wrangling over the fate of Japanese Prime Minister Naoto Kan, under fire for his handling of the nuclear crisis, has been a spoiler. Kan signaled on Wednesday he was ready to resign in the coming weeks after parliament made headway on key legislation, setting the stage for Japan’s sixth prime minister in five years. Last month, the government said the expenditure of 19 trillion yen should be spread over the next five years to support reconstruction projects, which are expected to exceed 23 trillion yen in the next decade, with 80 per cent of them to be carried out in the first five years. Japan construction steel makes up 30 per cent of total steel consumption of 60 million tonnes a year. Kazuhiro Harada, senior analyst at SMBC Nikko Securities, slashed his estimate for new demand next year by half, to 1.2 million tonnes. Earlier, he expected a total of 12 million tonnes of new demand to be created in five years from 2012. Saying that demand could sag further, Katsuya Takeuchi, an analyst at UBS, also cut his estimate to 500,000 tonnes from 1 million.
The estimates indicate a gain of nearly 3 to 6 per cent in the 18.6 million tonne-a-year construction steel market, the first increase in five years, but still only a fraction of the capacity of about 43 million tonnes of Japan’s steel mills that use scrap to produce construction steel.
Nippon Steel Corp, Japan’s top steelmaker and the world’s fourth-biggest, was more pessimistic, saying the boost to demand from the disaster would be smaller than that seen at the time of the Kobe earthquake. “Demand for steel this time would be much less than that of Kobe — probably less than half of the 3 million tonnes demand created at that time,” Shinichi Taniguchi, Nippon Steel’s executive vice president, told a news conference last month. Reconstruction projects in the devastated region would require less steel than Kobe and damage to ports and bridges was limited, he said. The Bank of Japan Tankan survey revealed in July that the construction sector was by far the most pessimistic on its future business outlook of all sectors polled. Orders for construction steel plunged 13.1 per cent in May to 432,000 tonnes. Many businesses have canceled or postponed projects since the quake due to uncertain demand and as many piles of rubble and debris remain to be cleared away.
YEN WEIGHS:
The steep rise in the yen, which is up about 5 per cent this year, is also bad news for steel makers as it makes their products less competitive in international markets. Steel demand could sag further if the strong yen and a power shortage push more Japanese manufacturers to move production abroad and cut capital investment at home.
“At the yen/dollar rate of 76 yen, no manufacturers are willing to build new plants here for export to growth markets,” Yamada said.
Toyota Motor Corp, Japan’s biggest steel user, which builds 40 per cent of its vehicles at home, has warned the high yen was hobbling it in the battle against South Korean rivals. To weaken the yen, Japan intervened in the currency market last week for the first time since March.
Eiji Hayashida, chairman of the Japan Iron and Steel Federation and president of JFE Steel, has repeatedly said the yen level and the speed of its rise have exceeded the ability of Japanese manufacturers to cope with them.
To counter the sector’s malaise, Nippon and Sumitomo plan to merge to create the world’s second-largest steelmaker, as the industry grapples with surging prices for steelmaking ingredients iron ore and coking coal.
Blast furnace steelmakers, which use iron ore and coal as inputs, are being forced to sell H-beams used for buildings at below cost due to competition from smaller mills — specializing in construction steel — which melt lower-cost steel scrap. Nippon early this year said it wanted to bolster the H-beam price in the domestic market to above 100,000 yen per tonne, but the price now hovers at around 75,000 yen after Tokyo Steel Manufacturing cut its price 6.2 per cent in May.
“It’s high time the big blast furnace steelmakers restructured troubled construction steel businesses,” said an official of a big construction steel distributor. “There is no question a planned merger between Nippon Steel and Sumitomo would accelerate an industry revamp.”
