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Nippon Steel, Sumitomo Expect Big Losses before Mega-Merger

By Unknown , 2012-09-12 12:00:00

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Ahead of a mega-merger that will create the world's second-biggest steelmaker, Nippon Steel Corp. (5401) and Sumitomo Metal Industries Ltd. (5405) said they expect to suffer a combined net loss of $3.6 billion for the interim period as they write off production facilities.

Nippon Steel, Japan's largest steelmaker by output, said Thursday it now predicts a net loss of Y155 billion for its fiscal first half ending Sept. 30, even deeper than the Y85 billion loss in its previous outlook it made in late July.

Separately, Sumitomo Metal said it expects a net loss of Y128 billion for the first half, much worse than a net loss of Y8 billion in its previous outlook.

The revised outlook is an admission of how the tough the business environment has become for steel makers. The yen's strength has eroded their competitive edge when it comes to exports and overseas rivals in China and South Korea are ramping up exports and flooding Southeast Asian markets, pushing down prices.

Nippon Steel said it will book a one-time loss of Y120 billion for the July-September quarter, as it has decided to write off operating assets held by its two loss-making steel plants in Hirohata and Sakai in western Japan.

Sumitomo will also suffer Y120 billion extraordinary loss caused by a writeoff of assets at its steel-making plant in Wakayama.

Nippon Steel and Sumitomo Metal, the nation's third-largest steelmaker, are scheduled to merge on Oct. 1. The two companies said separately they will keep operating the facilities they are writing off.

They also said the asset writeoff has nothing to do with their merger and that the decision was simply made to comply with accounting standards related to fixed asset impairment losses.

"It shows their forward-looking approach (for the merger) and in the longer-term, writing off the losses at an earlier stage may be positive," said Hideyuki Ishiguro, senior strategist at Okasan Securities.

"But, the industry faces fundamental problems including mounting inventories in China and falling steel market prices and business conditions remains bleak," he added.

Separately, Sumitomo Metal said it will buy back up to 500 million shares, or 10.79%, of its own shares held by Nippon Steel. That portion is the amount of Sumitomo shares held by Nippon Steel as part of a business tie-up that goes back to 2002. Sumitomo Metal said it will then cancel all of shares it bought back from Nippon Steel on Sept. 28.

Nippon Steel reiterated it will release a full year outlook for the merged entity after the October integration.

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