Weak yen, returning carmakers throw lifeline to Japan's steel mills

7 August 2015

Japanese steelmakers are a lone bright spot in a global industry weighed down by a prolonged slowdown as a weaker yen spurs the country's automakers, big buyers of steel, to shift some production back home.

A 60 percent plunge in the yen in the past three years is prompting automakers and other manufacturers to heed Prime Minister Shinzo Abe's call to build at home and help revive Japan's sluggish economy, lifting demand for steel that is used in cars and for construction.

The optimism contrasts with the view on steel mills in China, India and South Korea, where foreign exchange has not been as favourable. The biggest drag on their outlook is cheap steel from top producer China, where an economic slowdown has curtailed domestic use of the metal.

While Japan, the world's No.2 steel producer, has also been grappling with high stockpiles after a sales tax hike last year restrained demand and pushed the economy into recession, mills could see some relief as local auto output climbs in 2017-18 towards levels last seen before the global financial crisis.

"Steel demand in the October-to-March period will be fairly strong," said Shinichi Okada, the executive vice-president of Japan's No.2 steelmaker JFE Holdings, citing Tokyo redevelopment projects and higher vehicle production.

After years of moving production overseas, Japanese automakers are aiming to ship more cars from home as exports become competitive with the yen's decline.

Toyota Motor has said it will increase domestic production by 80,000 vehicles from an earlier plan, while Nissan Motor plans to raise local output by 26 percent in 2017-18 versus the year that ended in March.

Honda Motor has already shifted production of Fit subcompact cars from Britain to Japan from June, adding 20,000 vehicles to domestic output. It plans to make 30,000 extra cars in Japan from September while cutting output in Mexico.

Mitsubishi Motors has also joined the shift, saying it will stop building cars in the United States and serve the U.S. market from Japan and Thailand.

"The yen's weakness is now having real effects," said Nomura Securities' analyst Yuji Matsumoto. "The repatriation trend will buoy steel demand."


As carmakers move to factories at home, Japan's vehicle production could rise by as much as 700,000 by 2017-18, Matsumoto said, potentially pushing output to above 10 million.

That would be the highest since 2008 and would require Japanese mills to produce about 600,000 tonnes more automobile steel, up 5 percent from 2014 levels.

But there is one worry - a spike in Japan's demand could prompt producers elsewhere in Asia, in countries like China and South Korea, to send excess steel to Tokyo.

At 110.7 million tonnes last year, Japan's steel output is dwarfed by China's production of around 800 million tonnes.

With demand lagging its output, China has already ramped up steel product exports by 27.8 percent year-on-year to 52.4 million tonnes in the first half of 2015.

Chinese steel prices are near their lowest in more than 20 years and the country's steel association said 43 percent of its members lost money in the first half of 2015.

The outlook is grim in South Korea and India too.

POSCO has said it will cut unprofitable local and overseas businesses, while JSW Steel Ltd last month posted its first consolidated quarterly loss in seven.

Japan's mills, however, expect inventory to clear up soon.

"Inventory adjustment is taking longer than anticipated, but it will end in the summer," said Katsuhiko Ota, the executive vice president of Japan's top steelmaker Nippon Steel & Sumitomo Metal Corp, helped partly by higher public works orders and a recovery in car output.