Japan: Tokyo Steel reports 8% y-o-y decline in sales in H1FY'24 on sluggish export demand

Japan Metal Daily: Tokyo Steel reported a decline in its non-consolidated financial results for the first half of FY2024 (April-September 2024). Net sales dipped 7.9% y-o-y to JPY 174.27 billion, primarily due to a decrease in export volumes amidst sluggish overseas markets. Operating income, ordinary income, and net income also witnessed significant y-o-y declines of 35.4%, 33.8%, and 37%, respectively.

Factors weighing on performance

The decline was worsened by the impact of Typhoon Lan, which reduced shipment volumes by approximately 15% during the July-September period compared to the previous quarter.

Additionally, the narrowing of metal spreads and a write-down of JPY 1.6 billion on products and raw materials at the end of the interim period further contributed to the overall decline in profitability.

Sales volume and product breakdown

The company's domestic sales of steel products from April to September totalled 1.517 million tonnes (mnt), reflecting a decrease of 133,000 tonnes (t) compared to the same period last year. However, the sales to Japan increased by approximately 29,000 t, reaching 1.288 mnt. Yuji Komatsuzaki, Director, Managing Executive Officer, and General Manager of the Sales Division, attributed this positive trend to the growing recognition of electric furnace material as a sustainable "green steel" option.

Conversely, export volumes experienced a significant decline, dropping from 229,000 t to 162,000 t. Komatsuzaki noted that this decrease was more pronounced than anticipated. As a result, the export value ratio contracted by 7.2 percentage points y-o-y, settling at 13.6%.

Operating profit

The operating profit for the April to September period declined by a significant JPY 7.6 billion compared to the same period last year. Several factors contributed to this decrease. Primarily, metal spreads narrowed by JPY 2,884 million, resulting in lower profit margins. Additionally, a decrease in sales volume of JPY 1,731 million and increased costs of JPY 185 million further eroded profitability. Furthermore, a valuation loss of JPY 1.6 billion and a loss on receivables and payments of JPY 1.2 billion collectively contributed an additional JPY 2.8 billion to the overall operating profit decline.

Tokyo Steel revises full-year earnings forecast

Tokyo Steel has announced a downward revision to its full-year ordinary income forecast for the fiscal year ending March 25. The company now expects to achieve JPY 25 billion in ordinary income, a 24.2% y-o-y decline. This revision is attributed to a significant decline in exports and sluggish domestic market growth, coupled with narrowing spreads.

In the second half of the fiscal year, steel sales are projected to decrease by 197,000 t compared to the first half. While the selling unit price and steel scrap unit price are expected to decline, the most significant impact will come from a deterioration in the metal spread, which is estimated to decrease by JPY 1,800 to JPY 56,400.

As a result, operating profit in the second half is anticipated to be JPY 10.0 billion, JPY 3.9 billion decrease from the first half. Factors contributing to this decline include narrowing spreads, reduced volume, and increased fixed costs per ton due to lower production levels. However, the elimination of certain losses from the first half is expected to partially offset these negative impacts.

Outlook

Tokyo Steel is likely to experience continued pressure on its profitability in the second half of the fiscal year. While the domestic market offers some support, the decline in exports and narrowing metal spreads are significant headwinds. The sluggishness in overseas markets, particularly in export markets, is a significant concern. A continued decline in export volumes could further erode revenue and profitability. However, the company's strategic focus on domestic markets, cost control measures, and potential benefits from the "green steel" label could help mitigate some of the challenges.

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