Nippon Steel & Sumitomo Metal Corp expects demand for seamless pipes used in oil drilling to fall by up to 30 percent this business year, but aims to offset most of the impact through lower fuel costs, a senior executive said.

Nippon Steel, the world's second-largest steelmaker, is among the world's top makers of high-end seamless pipes used mainly for drilling oil and gas, along with French steel pipe-maker Vallourec and Italy's Tenaris.

Executive Vice President Katsuhiko Ota told Reuters in an interview the company was also targetting 50 billion yen ($420 million) in other savings this year, and hoped to boost profits at its overseas units by the same amount over three years.

He declined to comment on the company's overall earnings for the year to March 2016, saying the outlook for raw material prices, the yen's exchange rate, and steel output were still unclear.

The company has given no earnings guidance, but a poll of 20 analysts by Thomson Reuters forecasts a 6 percent increase in recurring profit to 480.5 billion yen ($4.03 billion).

"What we can say is that we'll cover a shortfall in seamless pipes by lower fuel expenses, save 50 billion yen from other cost cuts this year," Ota said.

"In addition, we aim to boost profits of overseas units by 50 billion yen over the next three years."

Tokyo-based Nippon Steel does not break out the financial contribution of steel pipes in its results, but analysts said the segment contributed more than 20 percent profit.

"The pipe segment is an important profit driver for Nippon Steel," said Yuji Matsumoto, an analyst at Nomura Securities, who expected the weaker demand to cut recurring profit this year by about 45 billion yen.

The firm sold 1.19 million tonnes of seamless pipes in the year ended in March, steady on a year earlier.

"For this business year, seamless demand is likely to fall about 20-30 percent as oil majors have warned that they would cut their orders that much," Ota said.

"Our product mix will get worse because seamless pipes generate higher margins than other products."

Global oil prices tumbled to six-year lows in March. Exxon Mobil Corp, Royal Dutch Shell Plc, BP Plc and others have slashed 2015 capital spending plans by 10 to 15 percent, delaying and scrapping projects.

However, lower prices would generate some savings, Ota said.

"The fuel cost for bulker (vessels) and trucks to deliver our products to customers are down sharply," he said.

"Those costs will add up. We don't know if we can completely offset the impact from weaker demand, but we aim to offset most of it," he said.

 

reuters.com

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