Skip to content

Steel’s New Number 2

October 16, 2012

ASIA BUSINESS October 4, 2012, 6:50 p.m. ET

Steel’s New Number 2

Merged Japanese Companies to Target Emerging Markets.

By JOHN W. MILLER

Nippon Steel & Sumitomo Metal Corp., which became the world’s
second-biggest steelmaker this week with the merger of two Japanese metals
titans, will focus on producing high-tech steel and reducing costs as it
wrestles with slowing demand.

Executives of the former Nippon Steel Corp., Japan’s biggest steelmaker,
and the former Sumitomo Metal Corp., the country’s third largest, have
ambitious plans for the new company, which wants to expand sales in
emerging markets. The company says it will seek to boost capacity over the
next decade, to 70 million tons of steel a year from the current 50 million
tons, even while simultaneously combining some operations and shutting down
its most unprofitable facilities. Nippon Steel & Sumitomo Metal said it
plans to increase capacity at key plants while cutting operations and costs
at others.

The companies had combined production of about 46 million tons in 2011,
trailing ArcelorMittal, which produced 97.1 million tons of steel last
year.

Executives also say they hope to negotiate better terms with raw-material
suppliers.

Nippon and Sumitomo agreed on the $22.45 billion tie-up in 2011 in the face
of slowing demand, weakening prices and increased competition from
lower-cost steel mills in China and South Korea. The Asian index price for
hot-rolled coil steel has fallen to $536 per metric ton, from $732 per ton
a year ago, according to London-based The Steel Index.

Slumping demand and oversupply have hit all steelmakers?average steel
margins globally have declined to 6% from over 20% for each year for most
of the last decade, according to Ernst & Young. But the Japanese
steelmakers were also hit by the devastating earthquake and tsunami of
March 2011, which forced the costly shutdown of some blast furnaces.

The new Japanese giant aims to carve out a niche in emerging markets for
lighter, stronger high-tech steel used to make cars, washing machines and
other advanced consumer goods. Asia now consumes 63% of the world’s steel,
three times as much as the U.S. and Europe combined. China takes half the
world’s 1.5 billion ton annual output, compared with 25% in 1980.

“We want to be the biggest high-tech steel company in the world,” Takeo
Aoyama, general manager for the firm’s U.S. division, said in an interview.
The combined company holds more patents?11,655?than any other steel company
in the world, executives said. ArcelorMittal declined to comment.

Analysts say the strategy makes sense. “The barriers to entry for high-tech
forms of steel are higher so steel companies have more pricing power,” says
Mark Parr, a Cleveland-based analyst with KeyBanc Capital Markets.
Lower-grade steel is used for beams, bars and other construction materials.

Shoji Muneoka, the new company’s chief executive, said last week he would
seek to slash costs beyond a previously set goal of $1.9 billion by 2015.
“The market outlook is uncertain due to a large demand-and-supply gap in
Asia,” Mr. Muneoka, who came from Nippon Steel, told reporters last week.
“But we’ll survive if we have a cost edge.” The new firm plans to combine
operations within its 16 Japanese mills and will look at closing some blast
furnaces, while seeking to protect jobs by moving workers to other
assignments.

“There’s value in consolidation, to reduce costs and improve
profitability,” says Harold Sidkin, a senior partner in the Chicago office
of Boston Consulting Group.

The newly merged companies also expect to use their combined purchases of
iron ore and coking coal to exact better prices from mining companies.
Miners have shifted away from longer-term contracts with steelmakers to
selling more on the spot market to more readily take advantage of rising
prices. The mining industry, however, is still far more consolidated and is
expected to continue to wield pricing power.

The Chinese domestic steel market is also heavily fractured and needs to
cut capacity by about 200 million tons, industry executives say. “Chinese
steel mills would be more worried about themselves,” than their new
Japanese competitor, said Henry Liu, commodity research head for Mirae
Asset Securities, a Seoul-based financial group.

Chuin-Wei Yap and Hiroyuki Kachi contributed to this article.

Write to John W. Miller at john.miller@wsj.com

A version of this article appeared October 4, 2012, on page B6 in the U.S.
edition of The Wall Street Journal, with the headline: Steel’s New Number
2.

Advertisements

From → JSIC Archives

Comments are closed.