Industry Trend Analysis - Quick View: Reputational Damage Key Risk In Kobe Steel Scandal - DEC 2017

The Latest: Japanese metal producer Kobe Steel admitted to altering data to overstate the strength and durability of aluminium and copper products, as well as falsifying data on steel and iron powders. As of the firm's October 8 statement, the amounts affected include approximately 19.3kt of aluminium products, 19.4kt of aluminium castings and forgings and 2.2kt of copper products shipped between September 2016 and August 2017. On October 11, Kobe also identified at least 140 tonnes of affected iron powders.

Implications: The most immediate implications of Kobe Steel's revelation include significant reputational damage stemming from widespread safety concerns as the products are used by major automakers and airliners. The hit to the firm's reputation, already evident in the 35% drop in share prices over two days, will spread across Japanese manufacturing, echoing Mitsubishi's fuel economy scandal in 2016 and Takata's airbag scandal in 2015.

Financially, Kobe Steel could survive the fallout, given a recent return to profitability (net income of JPY25.0bn in the quarter ended June 2017), substantial cash on hand (JPY248bn), non-core business units that could be sold (real estate), and the relatively small portion of affected products. Based on current estimates, this represents 1.5% of copper and 10.8% of aluminium sold over the fiscal year ended March 2017. Nonetheless, Kobe's financial responsibility for customers' recalls and damages will result in the firm's underperformance over the coming years, compounded by a poor outlook for global steel prices.

Crisis In Confidence
Kobe Steel (JPY), Weekly
Source: Bloomberg, BMI

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