TOKYO: A soaring yen in the wake of Britain's decision to leave the European Union may stymie a possible recovery in Japanese demand for steel, said an official at the country's top maker of the material.
Nippon Steel & Sumitomo Metal Corp Executive Vice President Toshiharu Sakae said that a higher yen could force Japanese manufacturers that use steel, such as automakers, to cut local output.
A stronger yen makes Japanese products more expensive for holders of foreign currencies in export markets.
The yen has jumped around 14 percent this year after safe-haven demand shot up as the so-called 'Brexit' vote unleashed a wave of uncertainty in global financial markets. "We have been experiencing headwinds since the yen's surge after Brexit," Sakae told Reuters in an interview this week.
"We had expected a pickup in domestic steel demand in the second half of this (financial) year, but we now see an amber light," Sakae said, suggesting he is less confident on the outlook for demand in the October-March period. The world's No.3 steelmaker by output last month reported its first-quarterly loss in four years, and forecast a 35-percent drop in annual profit due to lower steel prices and the stronger yen.
To offset about 70 billion yen ($690 million) in damage from the higher yen this year, Nippon Steel aims to take steps such as cutting costs, Sakae said. The company's earnings have been trailing levels targetted in its three-year business plan, which include a 10 percent goal for recurring profit-to-sales ratio in the year to March 2018. The ratio for the last financial year was 3.4 percent.
"We now face a triple whammy of slumping global steel prices, lower oil prices that battered demand for seamless pipes, and a higher yen," Sakae said.
"We'll need to craft our next mid-term business plan based on these conditions. It will likely include a reduction of fixed costs through the consolidation of facilities in Japan, as well as overseas expansion including more M&A," he said. Elsewhere, Nippon Steel has been at loggerheads for around two years with Ternium SA over control of their jointly owned Brazilian steelmaker, Usinas Sider?rgicas de Minas Gerais SA.
The firm, known as Usiminas, has been hit by Brazil's worst recession in decades. Breaking up Usiminas, which was proposed by Ternium, is an option, Sakae said, but the priority should be to revive the company's earnings through further cost cuts and sales reinforcement. "We see big potential in Brazil and its economy ... we can't lose Usiminas," he said.
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