JFE Holdings Inc., Japan’s second-biggest steel producer, is sticking to its forecast that prices will recover in the second half, in the belief that Chinese mills currently flooding the world market will have to cut output to stem losses.

“At issue is whether Chinese mills will continue loss-making exports,” said Koji Kakigi, president of JFE Steel Corp., the unit that drives more than 70 percent of the company’s sales. “When the market mechanism works, they will take various steps, like cutting output and lowering plant utilization rates. We anticipate such behavior will occur.”

As China’s economy falters and domestic demand wanes, its steel exports are surging, on pace to reach 100 million metric tons this year. That’s about the same level as total output in Japan, the world’s No. 2 steelmaker. Net profit at medium-to-large mills in the first six months slumped 73 percent from a year earlier, according to a China Iron and Steel Association survey of its members.

Output Cuts

That means output cuts, as China’s mills adjust to withstand the prolonged slump in prices, Kakigi said Monday in an interview at the company’s Tokyo headquarters. It should aid a recovery in the second half, which in Japan ends in March, for other mills competing on Asian export markets.

Kakigi said the company plans to produce 28 million tons of crude steel for the fiscal year, almost the same as last year and unchanged from its July forecast -- although that was made before China began devaluing its currency in August.

Yuan Devaluation

Kakigi said China’s devaluation equates to about $15 for hot-rolled steel. That’s less than 5 percent of the total cost per ton and doesn’t account for the higher price China is paying for raw material imports. “We don’t expect the yuan’s devaluation will give Chinese suppliers a big advantage and that our portion of exports will decline,” he said. The bigger issue is Chinese mills’ profitability.

JFE Steel plans to complete its shedding of excess inventories by the end of September and return to its usual pace of production in the second half. Japanese Prime Minister Shinzo Abe’s steps to weaken the yen and boost infrastructure spending in Japan has given JFE and its domestic peers a competitive edge over Chinese and South Korean mills, according to Kakigi.

Boost Sales

Kakigi reiterated the company’s plan to boost annual sales by 25 percent to 40 million tons by March 2018. To meet that, it needs to expand outside its home market and follow its manufacturing customers as they build businesses overseas, he said. Domestic demand growth should wane after the 2020 Tokyo Olympics and as the population shrinks.

Overseas Markets

“Unless the company targets growth in overseas markets, we won’t be able to secure a firm position in the global steel industry,” he said. “We can’t expect growth as long as we just stay at home. It’s a choice of growth or decline.”

In addition to its recent investment in Formosa Plastics Corp.’s $10.5 billion project to build an integrated steel plant in Vietnam, JFE Steel is considering a facility in North America to make steel sheets for Japanese auto suppliers.

The steelmaker will probably make a decision on the plant by the end of the year, Kakigi said. Details, including a potential partner and the location and cost of the facility, are still being considered.