BRI: Japanese Steel Producers – Creation of Value Destruction: Structural Short Thesis on Japanese Steelmakers

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Japanese Steel Producers – Creation of Value Destruction: Structural Short Thesis on Japanese Steelmakers

Jefferies published a franchise note drawing attention to the fact that steelmakers globally have been destroying value by not earning their cost of capital. Chief among these are Japanese producers with aging equipment and weak negotiation terms with customers. Jefferies believes CY17-18 marked the peak of the steel cycle when robust global macroeconomic growth combined with China’s focus on environment limited steel exports. In Japan, demand from the construction segment was robust with an order backlog for the ‘20 Olympics and redevelopment projects, as well as car OEMs producing a record amount of vehicles. Still, major Japanese steelmakers such as Nippon Steel, JFE Holdings, and Kobe Steel missed their targets due to ongoing plant outages and unplanned blast furnace shutdowns. Smaller accidents in such a large-scale operation is a recurring issue. However, the frequency and magnitude of the Japanese steelmakers’ issues are hard to ignore—and competition is heating up. Jefferies shares evidence and introduces a structural short thesis, downgrading Nippon Steel to UNPF, Kobe to Hold, remain UNPF on JFE and Daido, while reiterating Buy ratings on Yamato Kogyo and Tokyo Steel. FULL REPORT

Thanh Ha Pham, Japan Steel Producers