International credit ratings agency Moody’s has announced that it has changed the outlook for JFE Holdings Inc, Japan’s second-largest steelmaker, from stable to negative.
The agency’s outlook factors in JFE’s deteriorating profitability and the increased possibility of its financial profile weakening further over the next 12-18 months. The agency’s decision follows JFE’s downward revision of its full-year guidance, by lowering its profit estimation for the fiscal year ending March 2020 to JPY 60 billion ($550.71 million), which equals 25 percent of its last year’s profit. In addition, JFE also expects its margin to decline to 1.6 percent in the fiscal year 2019-20, from six percent in the previous fiscal year.
“The company's weakening profits reflect the challenging conditions for Japan's steel industry, where Chinese demand is driving up input costs such as iron ore prices, and falling domestic demand is dampening sales. The profitability of steel exports is also declining, as excess supply from Indian and Russian mills lowers market prices as a result of weaker demand in these countries,” said the agency in its statement.
Moody’s also stated that the steel sector faces increased environmental risks and costs to reduce emissions, though JFE’s investments to lower that risk are higher compared to its peers. Furthermore, steelmakers might face changing demand from the auto sector as it transforms itself.
The agency said that the negative outlook for JFE Holdings is unlikely to be upgraded in the short term.