Japanese steel industry is suffering from surge in inventories despite production cuts. The steel output is forecast to be flat in 2016 as well. The steel manufacturers in the world's third largest economy are struggling with overcapacity.  

The metal stocks on Tokyo bourse were trading lower. Japan's second largest steel supplier JFE Holdings Inc's stock fell four percent and trading 3.1 percent lower at Yen 1,900 on Tokyo Stock Exchange. Tokyo Steel Manufacturing Co's share too fell over six percent. 

According to a report by Bloomberg, the Iron and Steel Index dropped the most among other industrial segments listed on Japan's Topix. The metal inventories except specialty alloy, rose 1.3 percent to 6.67 million metric tons by end of November 2015, according to the Japan Iron and Steel Federation.

Japan's Trade Ministry has stated that steel inventories remain at high levels amid cuts in production. This is due to the more than expected drop in demand. The glut in steel supplies is impacting the global steel industry. 

Japan Metal Bulletin, the Japanese steel industry has been suffering for the past 18 months. The drop in steel orders fell and brought down the domestic consumption to lowest levels since May 2011 after Great East Japan Earthquake. The domestic demand fell by over 10 percent causing oversupply situation.

Kazuhiro Harada, a senior analyst at SMBC Nikko Securities Inc, said: "Ordinary steel inventories increased in November rather than decreased. That's negative for the market." The Japan's steel industry is impacting the economy recovery.

The slump in China's commodities market is mostly impacting the global steel industry including Japan steel makers. Japanese mills export most of their steel production. Japanese steel makers such as Nippon Steel & Sumitomo Metal Corp and JFE export over half of their production. Japanese steel exports are forecast to fall by 6.4 percent.

The fiscal year for Japan's crude steel production begins from April. The crude steel production in 2016 is expected to be 105 million tons, almost at the same level of 2015, as reported by Reuters. The weak signals in the Japanese economy are further confirming the forecast of decline in the demand for crude steel.

The Japan's Trade Ministry has predicted that the crude steel output is expected to ease 1.6 percent to 26.31 million tons in the coming quarter. At the same time, the Japanese domestic consumption may fall 0.9 percent. The drop in demand from shipbuilders and industrial equipment manufacturers is lowering the steel consumption in the country.