Nippon Steel, Trading Houses Offer Compelling Value Amid Structural Metal Shortages

We maintain an overweight stance on Japan’s cyclical materials sector. The market misprices the extent of Nippon Steel’s profit recovery, the structural nature of the looming copper deficit, and the defensive value of trading houses’ diversified portfolios and shareholder returns. Conversely, wire & cable valuations appear stretched, having priced in the data center theme.

Nippon Steel's Profit Recovery is Underappreciated

Market consensus for Nippon Steel’s (5401) F3/26 business profit is ¥285.8bn, which appears overly pessimistic. Our forecast of ¥493.0bn, 72% above consensus, reflects greater benefits from cost restructuring and a higher mix of premium products. This divergence supports a target price of ¥780, implying a 28% upside from current levels where the stock trades at a depressed 0.6x P/B (F3/26e). The investment implication is a significant rerating opportunity driven by successive earnings upgrades.

Copper Faces a Deepening Structural Deficit

A prolonged, structural copper shortage is emerging, which is not fully priced into equities. The refined copper market is projected to shift into a deficit from 2025, reaching 600kt in 2026 and 760kt by 2030. The concentrate market is even tighter, with a 4.8Mt deficit forecast for 2026, keeping treatment charges (TC/RC) low. This fundamental backdrop supports a sustained higher price environment, with our forecast at $11,775/t for 2026. Companies with direct copper exposure, like Mitsui Kinzoku (5706), are primary beneficiaries, where a 10-cent/lb copper price increase boosts operating profit by ¥5.1bn.

Trading Houses Offer Defensive Value and High Yield

Japanese trading houses present an attractive combination of shareholder returns and relative valuation discount. Major firms have explicit buyback and dividend policies, targeting total shareholder returns in the 3-5% range. On F3/26e, they trade at an average P/B of 2.4x and P/E of 16x, a discount to most global mining and oil & gas majors. Their diversified business models provide a buffer against volatility in any single commodity. This makes them a compelling defensive allocation within the cycle, with Itochu (8001) and Mitsui & Co. (8031) as preferred names.

Data Center Boom Favors Metal Producers Over Cable Makers

While global data center capex is forecast to grow at a 26.3% CAGR from 2024-2030, the investment benefit is more sustainable for nonferrous metal suppliers than for wire & cable manufacturers. The boom drives direct demand for conductive metals like copper and aluminum. Wire & cable leader Fujikura (5803) trades at a demanding 14.3x P/B, fully valuing this growth. In contrast, the earnings of metal producers like Mitsui Kinzoku are more directly leveraged to underlying commodity price strength, offering a better risk-reward profile.

Key Risks and Divergences

• Yen Volatility: A 1-yen move vs. the USD impacts Itochu's net profit by ±¥3.2bn, affecting all traders and importers.
• Chinese Steel Exports: Sustained high exports (c. 90Mt annually) pressure global steel pricing and the export margins of Japanese mills.
• Stretched Valuations: Select stocks, notably Fujikura (P/B 14.3x), carry high multiples vulnerable to a growth scare.
• Commodity Price Swings: Trader and nonferrous metal profits remain sensitive to cycles in key commodities like copper and coal.

Valuation and Trade Implications

Our overweight sector view is best expressed through: 1) Nippon Steel (5401) as the primary rerating candidate on earnings upside; 2) Copper-exposed producers like Mitsui Kinzoku (5706) to capture structural deficits; and 3) Major trading houses (Itochu 8001, Mitsui 8031) for yield and defensive diversification. We are cautious on the wire & cable segment due to elevated valuations.

Appendix: Key Data Summary