Japan's steelmakers are in the midst of the best market conditions in at least three years as steel prices rise with construction in full swing for the 2020 Olympics in Tokyo and automakers boosting production.

But the country's third-biggest steelmaker, Kobe Steel Ltd , is likely to be left out as it struggles to cope with one of Japan's biggest industrial scandals, involving widespread cheating on product specifications. The company says it has lost customers and analysts say more could cancel contracts after a seal of industrial quality was revoked last week.

Last week, Japan's biggest steelmaker, Nippon Steel & Sumitomo Metal Corp reported an 800% increase in net profit in the first half of the 2017/18 financial year.

JFE Holdings, the country's second-biggest steel maker, posted net profit in the first half after a net loss in the year-ago period, and it forecast that full-year profit will more than double.

Besides the construction for the Olympics and higher demand from auto manufacturers, Japanese steelmakers are also being boosted by a country-wide boom in hotel and shop building.

Overseas, a cutback in steel production in China is helping them recover from a period of high inventories and slack profitability.

"With large redevelopment projects in central Tokyo, construction materials are in tighter supply," said Kiyoshi Imamura, managing director at Tokyo Steel Manufacturing, Japan's top electric-arc furnace steelmaker.

Prices for the company's main product, H-shaped beams used in construction, rose to 81 000 yen ($711) per tonne in October, the highest since 2011, amid a tight domestic market and higher overseas prices.

The Japan Iron and Steel Federation has estimated the Olympics-related projects would boost steel demand by 2-million to 3-million tonnes in total.

"This is the first time since 2013 to see the steel market being pulled by stronger demand, instead of pushed by higher costs of materials," said Atsushi Yamaguchi, an analyst at SMBC Nikko Securities.

"This solid trend will continue through early next year," he said.

'TIDE IN OUR FAVOUR'
Backed by healthy demand from manufacturers, the average price of Nippon Steel's products rose to 83 500 yen per tonne in the April-September half, the highest since the six months through March 2015.

"The tide is running in our favour with strong local demand from manufacturers, particularly automakers, and with construction demand getting into full swing," Toshiharu Sakae, Nippon Steel's executive vice president, told an earnings news conference on Friday.

Nippon Steel's net profit for the April-September period came to 99-billion yen, 9-fold higher than a year earlier. It raised its interim dividend to 30 yen per share, from its earlier prediction of 25 yen, and forecast a 30% climb in full-year profit.

JFE Holdings executive vice president Shinichi Okada said falling exports from China helped boost steel prices in Southeast Asia, its main export target.

"We don't know how long it will continue, but there are no causes of concern for now," Okada said.

China's steel output dropped in September from a record high the previous month as mills cut production to fall in line with a government campaign to fight smog.

China's exports of steel products also declined for a 14th consecutive month in September, with January-September exports sliding nearly 30% from the same period a year earlier.

Kobe Steel also reported a 858% increase in net profit for the first six months to nearly 40 billion yen, but pulled its forecast for a first annual profit in three years as it deals with the financial impact of the data cheating.

The steelmaker's admission last month that it had found widespread tampering in product specifications has sent companies in global supply chains scrambling to check whether the safety or performance of their goods has been compromised.

Executive Vice President Naoto Umehara said the misconduct would likely reduce Kobe Steel's second-half recurring profit by 10 billion yen, 70% of which will mainly come from the steel business.

"We understand our customers are taking a harsh view of the data fabrication," Umehara said. "An immediate impact may be limited, but we may see more impact as time goes by."

Nippon Steel's Sakae and JFE's Okada said they have not received orders from customers of Kobe Steel.

Investors are generally upbeat about the steel market.

"Business condition for steelmakers looks fairly healthy with falling exports from China and strong capital expenditure worldwide," said Naoki Fujiwara, chief fund manager at Shinkin Asset Management.

Shares in steelmakers could have attracted more attention if Kobe Steel's scandal did not happen, he said.

"As long as the data cheating stays at the one company, rivals will likely benefit as Kobe Steel customers will likely reduce orders," he said.