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Plunging Oil Prices Felt Across Japan’s Industrial Base

Source: Bloomberg by Masumi Suga and Ichiro Suzuki
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The plunge in crude oil prices is taking its toll across Japan’s industrial base.
Forecasts from Nippon Steel & Sumitomo Metal Corp., Japan Marine United Corp. and Komatsu Ltd. show the extent to which lower crude prices are eroding the outlooks for industrial companies with businesses linked to oil and gas.
Nippon Steel said yesterday it will take a 68.6 billion yen ($580 million) charge related to a Brazilian venture that makes pipes for crude producers. The Japanese steelmaker, the world’s second largest, said it now expects net income to total 180 billion yen this fiscal year, down from an earlier forecast of 250 billion yen.
The writedown at Nippon Steel was “a shock” to the stock market,’’ said Yasuhiro Matsumoto, a senior manager in Tokyo at Abeam Consulting Ltd. “Investors hadn’t been predicting a company like that in the steel industry would write down a charge, so their announcement has cooled sentiment.”
While lower oil prices help Japan’s industrial companies because they lower energy costs, their units directly exposed to energy production are vulnerable to the slump in crude to six year lows.
“We began to see an impact on seamless pipe operations gradually due to the sharp decline in recent oil prices,” Katsuhiko Ota, an executive vice president at Nippon Steel, told reporters in Tokyo at a briefing. “If oil prices remain below $50, customers will likely refrain from ordering pipes.”

Write Down

Vallourec SA, the producer of steel pipes that owns more than half of the Brazilian affiliate with Nippon Steel, also said it will write down assets by as much as 1.2 billion euros ($1.4 billion) to reflect lower spending by energy producers. That trend was brought into sharp relief yesterday after Royal Dutch Shell Plc said it will cut spending by $15 billion over three years.
While it’s weaker orders for steel piping from drill rig operators that’s eating into earnings at Nippon Steel, for JMU the impact can be seen in stalled demand for the tug boats that pull the rigs.
Crude prices have dropped by more than half since June 30, forcing drillers to scale back on output. The number of oil rigs in the U.S. has declined to the lowest in two years, according to data from Baker Hughes Inc. Companies idled 49 U.S. oil rigs last week, bringing the total to 1,317, in the seventh weekly decline, Baker Hughes said on Jan. 23.

Fewer Rigs

Fewer oil rigs mean less demand for the companies that service them. JMU, which was formed by the merger of shipbuilding units at steelmaker JFE Holdings Inc. and IHI Corp., says interest in platform supply vessels and tugs has quietened.
Our customers “have changed to a ‘wait-and-see stance,’” JMU President Shinjiro Mishima said in an interview at the company’s Tokyo headquarters on Tuesday. “We started to see this trend at the end of last year and into the beginning of this year.”
Komatsu, which makes equipment for mining and construction companies, is monitoring markets in oil-producing locations for signs that slowing investment could cut demand, Senior Executive Officer Akira Sugiki said at a news conference on Wednesday after the company posted results. Chief Financial Officer Mikio Fujitsuka warned that a correlation between oil prices and demand for construction equipment has been experienced in the past.
Komatsu’s shares extended losses today after plunging 8.6 percent yesterday, which was their biggest one-day drop in six years. Nippon Steel was down 3.6 percent, having fallen 1.9 percent yesterday. JFE Holdings, which is scheduled to report nine-month earnings later today, pared some of its losses yesterday to trade 0.4 percent higher.

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