JAPANESE STEEL MAKERS – A POSITIVE VIEW ON MARGINS
The market is – or should be – well aware that Japanese steel production is falling. Consensus revenue estimates across the Japanese steel sector are consistent with QMG observations, and the latest steel output data released by the JISF, shows no respite with a further -4% fall in steel output in January. However, the consensus view on margins does not reflect the fact that prices have held up very strongly against the positive backdrop of falling costs (energy and raw materials) which suggests that sector profitability may be better than expected. This is something that QMG data gives strong insight into – see chart – and we continue to see upside in the shares of Nippon Steel & Sumitomo Metal (5401 JT).
Our data recently turned more positive on Japan – see link to recent monthly notefor commentary. However, within the detail, our data also shows that auto sales have not yet recovered from the increase in the level of consumption tax back in April 2014 (we are cautious auto makers on the back of negative sales and margin observations) and that export oriented sectors/industries are doing better than domestic manufacturers (Feb PMI dipped to 51.6 and has been averaging around that level for the past 12 months). We remain positive on stocks like Fanuc (6954 JT), Kubota (6326 JT) and Nippon Steel (5401 JT) and negative on the likes of Mitsui Engineering & Shipbuilding (7003 JT). Most recent positive additions to our Japan focus list include Yasagawa (6506 JT), Omron (6654 JT), GS Yuasa (6674 JT), SCREEN Holdings (7735 JT) and Nikon (7731 JT).
Chart 1: Japan Steel Producers (JA27.1) – Price/Cost/Volume
Chart 2: JA27.1 vs Nippon Steel and Sumitomo Metal – Margin