Profit target for Kobelco down 58% as China's economy slows down

Feeling the heat over the China's economy slowing down, Kobe Steel Ltd has reduced its profit target by 58 percent for its construction machinery unit Kobelco Construction Machinery.

Adding to this, the power shortage problem has further pushed up costs of Kakogawa Steelworks impacting the Kobe Steel's performance in a negative way. As a result, the production level has also come down at Kakogawa plant.

The Kobe-based steel maker's latest forecast puts net income at Yen 25 billion ($207million) for the year ending March 2016. This is lower than the last July's forecast of Yen 60bn. The slowdown in China's economy is adversely impacting Japanese companies particularly those with construction-related activity.

Kobe Steel is Japan's third largest manufacturer of metal and its Kobelco Construction Machinery Unit competes with industry majors such as Komatsu Ltd and the US-based Caterpillar Inc. Kobe Steel made a profit of Yen 86.50 billion for the previous year ending March 2015.

Kobelco contributed 21 percent to the Kobe Steel's profit and accounted for 17 of its total revenues.

The Diggers sales of Kobelco Construction Machinery are easing off amid the ongoing economy slowdown in China. Kobelco Construction Machinery unit is finding it difficult to meet the targets for profit and sales during the year.

Kobelco's President Jun Fujioka said that foreign companies' excavators sales to China are projected to drop by 40 percent this year. Fujioka is also Chairman of Japan Construction Equipment Manufacturers' Association.

According to a survey done by Japan Construction Equipment Manufacturers' Association, the drop in sales is likely to continue in 2016 also. Kobelco has slashed down Chinese operations by reducing production level to check excess inventories amid weaker demand.

The stock market reacted negatively to the profit forecast cut. Shares of steel makers were slipped under pressure. Stocks of Kobe Steel and JFE Holdings dropped on heavy selling in Japanese stock market. Other non-ferrous metal makers Mitsubishi Materials and Dowa Holdings were also registered losses.

Kobe Steel suffered 48 percent drop in its first quarter profit as machinery sales fell more than the forecast. Kobe Steel manufactures right from steel, aluminum to machinery for steel making. Its construction equipment unit also registered 84 percent drop following the slowdown in China's economy.

Kobe Steel has also cut its sales forecast for the full year by 2.6 percent to Yen 1.9billion. It has further lowered its operating profit by 24 percent to Yen 95billion. The increasing costs and reduction in production level are impacting the Kakogawa plan located in western part of Japan and it's one of the two plants of Kobe Steel.