Electric-Furnace and Specialty Steelmakers Q1 FY2027: AI gains, scrap-cost pain

The four companies averaged ¥79.5 billion in revenue and ¥3.78 billion in operating profit. Those averages mask wide differences, shaped by exposure to different markets and companies' ability to manage raw-material costs.

• AI and semiconductor demand provided a tailwind. Daido Steel's revenue rose 14.9% year on year, while Nippon Yakin's increased 7.8% as sales of high-performance materials grew. These growth markets supported results despite weakness in automotive demand.
• Raw-material costs separated the winners from the strugglers. Tokyo Steel could not raise prices fast enough to offset more expensive steel scrap. It swung to an operating loss of ¥2.3 billion from a profit of more than ¥4.7 billion a year earlier.
• Higher input prices can also lift earnings. Nippon Yakin booked a ¥1.6 billion inventory valuation gain as nickel prices rose, reversing a ¥1.3 billion loss in the year-earlier quarter.
• Net income and core operating performance diverged. Yamato Kogyo posted a ¥400 million operating loss, but equity-method earnings helped lift net profit to ¥12.3 billion, up 107.9% year on year. Tokyo Steel also remained profitable at the bottom line, helped by gains from securities sales.

Daido Steel stood out for growth in its core business. Revenue led the group at ¥163.5 billion, up 14.9% year on year. Operating profit also ranked first at ¥13.1 billion, an increase of 51.4%. Semiconductor and AI demand offset weakness in automotive markets.

At the other end, Tokyo Steel faced the toughest quarter. Revenue was ¥72.9 billion, down 1.3% year on year, while it recorded an operating loss of ¥2.3 billion. Its operating margin was minus 3.2%, the lowest of the four. Scrap costs rose faster than product prices, squeezing profitability.

Nippon Yakin posted the highest operating margin, at 11.1%, ahead of Daido Steel's 8.0%. But its ¥1.6 billion inventory valuation gain means the improvement cannot be attributed entirely to core business strength. Demand exposure and the ability to manage input costs determined the divide.

The companies differ in how they generate earnings and position themselves for future growth.

• Tokyo Steel revised product prices three times since the end of the previous fiscal year, but the pass-through of higher input costs still lagged. Net profit was ¥1.9 billion, down 49.5% year on year. Its full-year operating forecast calls for a ¥4 billion loss.
• Yamato Kogyo posted an operating loss in Japan, partly because of shutdowns accompanying equipment upgrades. Earnings at affiliates, mainly in the U.S., boosted ordinary profit. The company raised its full-year forecast, as its U.S. business grows in importance.
• Daido Steel increased operating profit by capturing semiconductor and AI demand. It left its full-year forecasts unchanged at ¥630 billion in revenue and ¥40 billion in operating profit, and plans to pursue M&A and major growth investments.
• Nippon Yakin benefited from higher sales of high-performance materials and an inventory valuation gain. It raised both its first-half and full-year forecasts, with full-year operating profit projected at ¥16 billion.

A recovery in steel demand alone may not be enough to stabilize earnings. Investors should also watch raw-material and product prices, as well as companies' exposure to particular end markets.

• Steel scrap and nickel prices can fluctuate sharply. If price increases lag, profitability can deteriorate quickly, as it did at Tokyo Steel.
• Inventory valuation gains lift profit when prices rise, but can reverse when prices fall. Nippon Yakin's gain replaced a loss in the year-earlier quarter.
• Stronger expectations for semiconductor and AI demand also bring the risk of a pullback in investment or orders. A slow recovery in automotive demand would leave companies more exposed to a narrow range of markets.
• Yamato Kogyo relies heavily on equity-method earnings, leaving results sensitive to the performance of its U.S. affiliates and market conditions. Its operating profit should be considered separately.
• Decarbonization and equipment upgrades require sustained investment. Companies must balance the cost of investment with the need to improve competitiveness.

Daido Steel ranked first in both revenue and operating profit. Nippon Yakin led on operating margin, showing that the largest company and the most profitable by margin are not the same. Daido Steel grew sales to AI and semiconductor markets, while Nippon Yakin's results reflected demand for high-performance materials and the impact of nickel prices.

Yamato Kogyo led the group in net profit growth, up 107.9%. Its operating result was nevertheless a loss, putting its ranking in net income at odds with its performance in core operations. Investors should distinguish operating profit from inventory valuation effects and equity-method earnings.

The results show how work in the steel industry is expanding into new areas. At Daido Steel and Nippon Yakin, materials development and quality control for semiconductor and AI applications support growth markets. At Yamato Kogyo, coordination with overseas businesses and managing operations during equipment upgrades are important.

Raw-material procurement and price negotiations also affect profits. Opportunities extend beyond engineering to purchasing, sales, overseas business and equipment maintenance. When comparing employers, look beyond revenue scale to the markets each company serves and the sources of its earnings.