Japan’s aggressive monetary easing measures and a falling yen will reshape the landscape of the Asian steel market, undercutting regional steelmakers’ profit outlooks.
If the yen moves from 95 to 120 against the US dollar, it will boost Japanese mills’ exports, with a “more than expected” negative impact on Asia’s regional steel price, Credit Suisse AG said yesterday.
“The weakening yen, if it goes to 120, will impose a US$50-US$65 per tonne cost advantage for Japanese steel, making Japan potentially the most competitive steel exporter in Asia,” Credit Suisse analysts, including Trina Chen and Shinya Yanada, said in a report.
Japanese Prime Minister Shinzo Abe’s new economic policy and the Bank of Japan’s additional monetary easing have provided a boost to the nation’s stock market and business sentiment, along with a 20 percent depreciation of the yen’s value against the US dollar since September last year.
The yen has fallen the most in the past six months among the 10 developed-market currencies tracked by Bloomberg Correlation Weighted Indexes.
Credit Suisse said it expected the yen’s continued depreciation would hurt Chinese, South Korean and Taiwanese exporters that vie for orders with Japanese firms in overseas markets, with Chinese firms facing more of a challenge because of already flat margins and the appreciating outlook of the yuan.
In terms of equity investment, Credit Suisse said the weakening yen prompted it to lower earnings and target prices for steel stocks in South Korea and Taiwan by between 5 percent and 27 percent.
“Our least preferred stocks are China Steel, Hyundai Steel and JSW Steel — all ‘underperform’ on their higher exposure to the export market and direct competition with Japan, high earnings sensitivity and relatively higher valuation versus peers,” the analysts said in the report.
Jeremy Chen (陳建名), Credit Suisse’s Taipei-based analyst, said in a separate report that he was lowering earnings forecast for China Steel Corp (CSC, 中鋼) by 10 percent this year and 7 percent next year, given that the yen’s weakness could persist.
The yen has depreciated by 22 percent against the New Taiwan dollar since September last year and 12 percent since the beginning of the year, according to the central bank’s data.
Credit Suisse said Japanese steel accounted for 30 percent of total Taiwanese imports of 7.9 million tonnes last year, while Taiwanese galvanized steel sheet exports to Japan represented 15 percent of total export volumes.
“We estimate that about 20 percent to 25 percent of CSC’s sales volumes are competing with Japan,” Jeremy Chen said in his report. “The impact is already being felt, as CSC cut its June contract price by 2.1 percent, in which management blamed the yen depreciation as a reason.”
Credit Suisse also cut its target price on China Steel’s shares from NT$26.4 to NT$22.4.
China Steel shares were unchanged at NT$25.95 in Taipei trading yesterday. They have dropped 5.12 percent so far this year.