TOKYO — Kobe Steel said on Thursday it expects a net profit for the year through March, its first in three years, of 45 billion yen ($410 million). There has been concern over how the steelmaker’s data falsification scandal, which came to light last year, could affect its results, but the impact so far appears to be limited. On the other hand, the financial figures also hint at the widening gap in profitability of the steelmaker compared to stronger rivals amid the upward trend of the market. “Steel demand was robust and we sold more than expected hydraulic excavators in China,” said Kazuaki Kawahara, an executive officer of the steelmaker, during a press briefing in Tokyo on Thursday. For the nine months through December, the manufacturer logged 55.8 billion yen in group net profit, a significant improvement from the 36.4 billion yen loss a year earlier.
In October, the business changed its projection of the fiscal 2017 net earnings, from the previous 35 billion yen in profit to “unknown,” citing remaining uncertainty over the negative impact of the falsification of quality inspection data. The announcement boosted worries, but in the end the steelmaker has managed to raise the initial profit forecast by 10 billion yen, thanks largely to stronger-than-expected demand in China for construction machinery and others.
The estimated negative impact of the scandal on financial figures remained unchanged from initial projection, totaling 10 billion yen — 4 billion yen for the aluminum and copper unit and 6 billion yen for the steel business — in which costs of compensation for affected customers, including replacement, are considered to be 1 billion yen or so, the steelmaker said.
During the press conference, reporters repeatedly asked about the impact of the scandal, but Kawahara explained that the effect on the company’s overall financial performance was limited.
By business sector, aluminum and copper logged 10.8 billion in pretax profit for the nine months through December, up 9% on the year. The unit was the center of the scandal, and its profitability fell due to the efforts at quality improvement following the scandal — getting rid of products failing to meet quality standards, for example — as well as lower production yields.
However, “the automotive demand for aluminum products was strong,” said Kawahara. The material is crucial for cutting the weight of vehicles. Several Kobe Steel factories have had their certifications from Japan Industrial Standards revoked because of their inadequate quality management practices. But this has not caused serious outflows of customers so far, he explained.
The steel business accounts for nearly 40% of the maker’s sales, and the unit’s pretax profit for the nine-month period turned into the black, with 19.9 billion yen, from the 24.9 billion yen in losses it posted a year earlier. The Chinese government’s moves to ease a steel glut in China has lifted the market for steel products. The rise in raw-materials prices has been offset by raising steel product prices.
The construction machinery business did particularly well. Pretax earnings for the nine months significantly improved, from 32.7 billion yen of losses a year earlier to 15.8 billion yen in profit, leading to revising up the full-year projection.
One of factors for the unit posting losses a year earlier was that it recorded an additional allowance for doubtful accounts related to power shovel sales in China. But the allowance was cleared by the 2017 third quarter through December and higher-than-expected shovel sales in China pushed up the unit’s earnings.
Still, even the expected posting of the first net profit in three years is not promising enough for the steelmaker’s future. The net losses for fiscal 2015 and 2016 also hinted that the stable profit sources of aluminum and copper or electric-power units were unable to offset the poor performances of the steel and construction machinery units.
Even the stronger numbers for this fiscal year have not enabled the company to make the most of the current strong market conditions as much as its rivals have. For instance, the full-year pretax profit of the steel business at Kobe Steel is projected at 15 billion yen, with a pretax profit margin of 2% or so. The margin ratios for Nippon Steel & Sumitomo Metal and JFE Holdings, in contrast, are some 5-7%, on pretax profits of 255 billion yen and 185 billion yen, respectively.
Although Kobe Steel has strength in high-value-added products, such as steel wire for automotive springs, the business unit’s profitability is not competitive enough.
For crude steel production, too, the annual 7.5 million tons of output at Kobe Steel is far below the two leaders, 47 million tons for Nippon Steel and 30 million tons for JFE.
Steel production can often benefit from economies of scale. But Kobe Steel in October halted furnace operation in its Kobe Works, and the gap in output with the two leading steelmakers will likely become wider. Hiroya Kawasaki, chairman and president of the steelmaker, insisted that the decision to consolidate furnace operations into the Kakogawa Works will substantially increase the profitability of its steelmaking, but time will tell whether the move will turn out to be favorable.
For flat-rolled aluminum products, Kobe Steel’s output is roughly half that of UACJ, the world’s No. 3 producer and No. 1 in Japan.
After years of slump, Kobe Steel’s construction machinery business expects to post 18 billion yen in pretax profit, on sales of 355 billion yen for the year through March, largely thanks to booming market conditions. Profitability looks like it is improving, but the unit’s pretax profit margin, at 5% or so, is not impressive compared with those for market leaders Hitachi Construction Machinery and Komatsu.
The construction machinery business, meanwhile, is listed as a focus area of the planned structural reform the steelmaker calls for in its medium-term business plan for fiscal 2016-2020. Under the plan, production capacity in China has already been cut.
If a sudden comeback of construction machinery in China raises the business unit’s performance sharply, it will not be driven by the steelmaker’s own capability, so any benefit Kobe Steel can expect is limited compared to its rivals.
The company has long distanced itself from industry consolidation. Rivals Kawasaki Steel and NKK merged to create JFE Holdings. Nippon Steel and Sumitomo Metal Industries joined hands and consolidated their foothold as industry leader. And in the aluminum industry, UACJ has an overwhelming lead.
Kobe Steel did have opportunities to reorganize and possibly combine parts of its operations with its rivals’. But, said an industry official, “individual sections [at Kobe Steel] have so much power that top executives can’t really make decisions” about industry reorganization.
Since the data falsification scandal came to light in October, the company has been putting customers and safety checks before anything else. A third-party investigation into the scandal, in which the company admitted it had falsified product quality data, is still ongoing. With the responsibilities of Kawasaki and other top officials in relation to the wrongdoing still unclear, the company is unable to make important management decisions.
The steel and construction machinery operations are improving. But after the fiscal year ends in March 2019, profit may fall depending on the health of the Chinese economy, among other factors. The company now needs new, strong management that can make decisions.
Chairman and President Kawasaki is committed to making his company a major presence in the global market, but the road to that goal seems long and rocky.
Edited by Abdelaziz ADDAD