Kobe Steel’s Data Fabrication Scandal Grows; Customers Eye Safety Impact

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The scandal engulfing Kobe Steel Ltd. deepened on Wednesday as the Japanese steelmaker said it may have falsified data about another of its products, which is typically used in automobile parts including brakes and steering components.

The country’s third-largest steel producer discovered data on the iron ore powder that failed to meet a customer’s requirements, Yoshitsugu Nishimura, a spokesman, said by phone, confirming a report in the Yomiuri newspaper. Nishimura later said the powder falsification is suspected. The company’s shares collapsed a further 20 percent in Tokyo after a 22 percent loss on Tuesday.

Kobe Steel admitted on Sunday that staff at several plants had falsified metals product data for years. The revelation is a further blow to the reputation and trustworthiness of Japan’s industrial companies, and has sent customers from Toyota Motor Corp. to Subaru Corp. scrambling to determine whether they had used the suspect materials. The government weighed in on Wednesday, with Deputy Chief Cabinet Secretary Kotaro Nogami saying the faked data undermines the basis of fair trade and is inappropriate.

If you look at previous instances with “companies initially saying it is a single, one-off, it has always expanded to more and more parts of the business,” said Alexander Robert Medd, managing director at Bucephalus Research Partnership Ltd. “One usually finds out that it is reasonably systematic.”

The details are under investigation for a single iron powder product that was delivered to one customer, Nishimura said in his initial remarks, declining to identify the customer. The company doesn’t see a problem with the safety of the product, according to Nishimura.

Damage Done

One estimate from JPMorgan Securities Japan Co. put the potential cost of replacing the copper and aluminum parts at about 15 billion yen ($133 million), but the damage to the company that’s more than a century old — both in reputational harm or possible legal challenges– may be much greater.

The market impact has already been savage as investors take fright at the possible consequences. While at Friday’s close, Kobe Steel had a market value of 498 billion yen ($4.4 billion), by Tuesday that was down to 389 billion yen, and it fell further to about 313 billion yen on Wednesday. It dollar terms, that’s a drop of about $1.6 billion, according to Bloomberg calculations.

Investors have also rushed to unload Kobe Steel’s bonds, causing the extra yield demanded to hold the securities over Japanese government notes to jump. The premium on the company’s securities maturing in November 2021 rose 148 basis points to about 202.5 Tuesday, the highest since the firm issued them in late 2011, according to Bloomberg-compiled data. The cost to insure Kobe Steel’s notes against non-payment has surged.

Iron ore powder is mainly used in making automobile components, according to Kobe Steel. Powders can be hardened to produce sintered parts, which are used in everything from the engine to the steering mechanism as well as the brakes and transmission, according to JFE Steel Corp., another Japanese producer.

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