PSA Steel Sector Primer – The Current Situation Looks Favourable for Japanese Steel Makers

Steel Sector Primer – The Current Situation Looks Favourable for Japanese Steel Makers

The Japanese steel sector, being a classic economic cycle play, doesn’t usually require a lot of attention. You either buy it if the economy is overheating, or else you ignore / sell it. However, when the economic situation is nuanced, as it is now, there is some merit to doing some digging. When steel prices start moving, it is the electric furnace steel companies which benefit first, because they operate in the spot market, whereas blast furnace steel companies rely heavily on long-term contracts. Over time, though, the situation flips round, as blast furnace steel companies can push through price hikes to customers and these hikes stick. There are also customer-based differences. The electric furnace steel sector sells its products almost entirely into the private construction market, and so domestic construction activity is an important indicator. Blast furnace steel makers can switch production between automotive and construction, so they need one or other to be strong, with auto production being the more critical.

While demand for stainless products tends to be driven by the global economy, the key here is nickel prices. When the nickel price is rising, there’s likely an imbalance in the stainless steel market, and so stainless prices are likely to rise, too. However, if  the nickel price is rising, look out for the two ferronickel producers, Pacific Metals and Nippon Denko, as they are heavily leveraged to this. At present, nickel prices aren’t doing much, but this can change. Steel is an easily exported product. This means that even if domestic demand isn’t great, if the global situation is healthy enough, then there’s a market for Japanese steel. However, this is where the currency becomes critical. What steel companies can’t deal with is a weak domestic economy, a strong global economy, plus a strong yen.

Given all this, the current situation does look pretty favourable for Japanese steel companies. The domestic economy is doing okay and there is a construction boom as part of the lead-up to the Tokyo Olympics. The global economy is motoring, especially in China / Southeast Asia, and this is good for pricing. The yen is sufficiently weak, and appears to be weakening further as well.