Japan's top three steel makers, including world No 3 Nippon Steel Corp, are expected to slightly raise their profit forecasts on Thursday to reflect a sharp recovery in export prices amid a sign of weakening in China's steel market.
The expectations of higher profit pushed shares in Nippon Steel up 1.6 percent to a 15-year-high of 504 yen on Monday, making it the most actively traded stock on the main board. The stock closed up 0.6 percent at 499 yen, while the benchmark Nikkei average gained 1.39 percent.
Nippon Steel, world No 4 JFE Holdings Inc and Kobe Steel Ltd, Japan's fourth-biggest steelmaker, will announce their revised earnings outlooks for the year to March 2007 on September 7 based on latest price trends.
All three firms are seen upgrading their conservative pretax recurring profit estimates for the first half and full year by 4-10 percent following an estimated 20 percent rise in export prices of hot-rolled coil in July-September from the previous quarter.
Analysts expect the Japanese steelmakers to manage to keep that same level of export prices to at least October-December despite China's Baoshan Iron & Steel Co's recent cuts in some domestic prices. "The companies compiled their earnings forecasts before the market hit the bottom in February, and the estimates were too conservative," said Takashi Murata, analyst at Daiwa Institute of Research.
"Recent signs of a weakening market in China are a bit of a concern, but the impact on Japanese companies' products would be very small and their earnings uptrend should continue at least until the end of this year," Daiwa's Murata said.
Japanese firms' shipment volumes also recovered in the first half after lifting production cuts, while they pushed further production of high-end steel to cut the exposure to the more commodity-related Asian market.
Nippon Steel and JFE are also expected to announce their first interim dividend payments in line with their strategy of increasing shareholder returns. Nippon Steel could pay a 4 yen dividend and JFE one of 50 yen, for the first six months.
After a two-year run of record profits, the three makers predict their profits for the year to March 2007 will fall by 11-18 per cent after they booked big appraisal profits on steel inventories last year due to a surge in raw materials costs and a boost in steel prices.
Mittal Steel's $40 billion acquisition of Arcelor in June, creating the world's biggest steel maker, has fanned speculation that Nippon Steel could lead industry realignment moves in Japan's steel sector, making it one of the best picks in Japan's steel sector.
The stock has risen 35 percent since a year low hit on June 14, outpacing the benchmark Nikkei average's 16 percent gain in the same period. Nippon Steel's recent 150 billion yen ($1.28 billion) share buyback has also tightened up the stock's liquidity.
JFE stock closed on Monday up 0.62 percent at 4,880 yen, while those of Kobe Steel Ltd rose 1.31 percent to 386 yen. The iron and steel sector ISTEL.rose 0.76 percent. While some analysts expect steel stocks could lose steam after they announce upward forecast revisions, others say their upside potential could continue.
"Given the uncertainties in the second half, the steel makers will likely come up with conservative first-half forecasts. In that case, the upside potential on the stocks will remain," said Kazuhiro Harada, an analyst at Deutsche Securities Inc.
The planned launch later this year of new car models by Nissan Motor Co is among encouraging factors, Harada said.