Japan's metallurgy remains stable despite fires and low prices

Moody's rating agency believes that the country's two largest steel producers - Nippon Steel & Sumitomo Metal (NSSM, A3 stable) and JFE Holdings, Inc (JFE, Baa1 stable) - will be able to maintain their credit level for the next 12-18 months. because companies' efforts to cut costs partially offset the impact of negative factors.

“We expect the NSSM and JFE to maintain financial profiles consistent with their rating tiers, given their actions to reduce their debt levels over the past two years,” said Takashi Akimoto, analyst at Moody's. Among the negative factors, fires were noted at the metallurgical plants of Nippon Steel, which occurred at the plant in Nagoya in January and Kawasaki in August 2015. The company analyzed the incident and took all the necessary measures for fire safety, additionally installing underground fire hydrants .

Experts believe that in October-December 2015, the internal stocks of steel products will normalize, and a balance will be achieved between supply and demand in the domestic market. “However, a weakening Chinese economy will negatively impact steel prices and profits for Japanese steel companies,” Akimoto adds.

The Moody report explains that the business environment for Japanese steel companies has deteriorated due to the following factors: 1) large stocks in the domestic steel market; 2) overproduction in China and imbalance in demand in steel markets in Asia; 3) weak demand for oil and highly profitable pipe products, due to the fall in oil prices; 4) losses from falling prices for raw materials and accidents.

However, the continued weakness of the yen supports the competitiveness of steel products, both domestically and internationally, partially mitigating the negative impact of oversupply in steel markets. The agency also expects companies to benefit from efforts to cut costs associated with the recent modernization of domestic production facilities.

In addition, while the steel giants will ramp up investments to modernize their domestic facilities and expand overseas, these investments will be funded from operating cash flow. Consequently, Moody's do not expect the companies to report a significant deterioration in their financial positions due to higher levels of debt. As for their efforts to reduce debt, over the past two years they have led to a recovery in their profitability.

In addition, high-quality steels are Japan's main exports, and such products are less vulnerable to price wars. However, the deterioration in the global steel market will lead to lower prices for high quality steel products in Japan.