TOKYO -- Japanese companies with resource and raw materials businesses are seeing varying degrees of earnings recovery based on supply conditions, rather than Chinese demand, which once held huge sway over the market.
Coking coal market conditions -- like the prospect of how long supplies will stay held back -- have become a hot topic among resource industry insiders lately. Production disruptions at major Australian mines in July and September have doubled the price of the steelmaking component from Down Under in just three months, from less than $100 a ton to over $200 in September.
This provides a powerful tailwind for Mitsubishi Corp. The general trading titan will get a net profit boost of around 80 billion yen ($760 million) from the rise in coking coal prices in the current year through March, according to Goldman Sachs Japan.
Mitsubishi said at the start of fiscal 2016 that its metals business, including coking coal, would break even on a net basis. But profit is certain to rise.
Zinc is another resource whose price has risen due to supply concerns. Closures of large mines have led to a 30% or so jump in international prices of zinc in the half year through the end of September. Leading zinc smelter Dowa Holdings upgraded its net profit estimate for the April-September half on Oct. 14.
Oil exploration company Inpex is riding the recovery in crude oil prices. The late September agreement by OPEC to lower output sent benchmark crude prices above $50 a barrel at one point. For each $1 per barrel rise in crude, Inpex's annual net profit gets a 2.9 billion yen boost. So earnings hopes are growing in the stock market.
Chinese demand has been a dominant factor in resource prices for some time. During the 2000s, the country's sharp economic growth markedly underpinned resource prices. And last year, a slowdown in the Chinese economy dealt a blow to the earnings of trading, oil, nonferrous metal and steel companies.
But gone are the days when China's demand swayed the earnings of the entire resource sector. "News on the supply side of the market now has a sizable impact," says Naohiro Niimura of Market Risk Advisory.
Since China has become such a huge supplier of steel, Japan's Nippon Steel & Sumitomo Metal has found itself in a vulnerable position due to a China-induced glut. Progress in weeding out loss-making "zombie" producers has been slow. And lower prices of iron ore -- which is used in steelmaking -- make it difficult to raise prices of automotive steel and other products.
Copper is another resource experiencing a supply glut. And with prices expected to decline further, Sumitomo Metal Mining's profit is expected to take a hit.
"No one expects China to return to its form from the mid-2000s," when the country accounted for roughly half of global resource demand, says Xiao Minjie, a senior economist at SMBC Nikko Securities. The business landscape has changed. Corporate managers' ability to draw up successful strategies in the new environment will be put to the test.