Bloomberg News

Nippon Steel & Sumitomo to Push Cost Cuts Amid Competition

October 01, 2012

Nippon Steel & Sumitomo Metal CEO Shoji Muneoka

Shoji Muneoka, chief executive officer of Nippon Steel & Sumitomo Metal Corp. Photographer: Tomohiro Ohsumi/Bloomberg

Nippon Steel Corp. (5401), which today formally combines with Sumitomo Metal Industries Ltd., will push to accelerate cost cuts in a bid to become more competitive with steelmakers in China and South Korea.

Nippon Steel & Sumitomo Metal Corp., as the new company is known, will streamline production lines at domestic steelworks, moving forward a plan to save 150 billion yen ($1.9 billion) annually three years after integration, said Shoji Muneoka, who was appointed chief executive officer of the Tokyo-based company today. Closing blast furnaces will also be considered in the longer term, he said.

“We will try to bring our cost levels lower to enable us to compete with emerging steel mills,” Muneoka, president of Nippon Steel before the merger, said Sept. 26 in an interview with a group of reporters. “Our cost competitiveness is relatively weak,” he said, citing more expensive Japanese products because of the yen’s strength as one reason.

The combination of Japan’s biggest and third-biggest steelmakers, announced in February 2011, was designed as a way to gain leverage over raw material suppliers while trying to fend off competition from South Korea’s Posco and Shanghai-based Baoshan Iron & Steel Co. (600019)

“Unless the new company cuts costs, they won’t be able to survive the competition.” said Yuuki Sakurai, president of Fukoku Capital Management Inc., which manages 1.5 trillion yen of assets. “Asian steelmakers will be locked in a fierce battle if the global economy slumps in the next year or two.”

Yen’s Strength

Nippon Steel & Sumitomo Metal traded at 157 yen as of 1:20 p.m. in the first day of trading in Tokyo, 1.9 percent lower than Nippon Steel’s closing price of 160 yen on Friday.

The two companies, battered by the yen’s appreciation and falling steel prices, on Aug. 30 forecast losses in the six months ended Sept. 30 on a combined 240 billion yen impairment charge at three unprofitable steelworks. The Japanese currency has gained about 8 percent against the U.S. dollar in the past two years, the second-biggest gain among the Group of 10 currencies tracked by Bloomberg.

It will be difficult to overcome “economic malaise, deterioration of supply-demand balance for steel and a slump in the market” in the short term, Muneoka said today in a speech to 1,000 managers and executives at the Tokyo headquarters.

Nippon Steel & Sumitomo Metal inherited 16 steelworks in Japan with 14 blast furnaces, which use iron ore and coal as raw materials to produce the alloy. The company will secure employment by moving extra jobs to overseas facilities and affiliates, Muneoka said Sept. 26.

Previous Merger

Nippon Steel was formed in 1970 through the merger of Yahata Iron & Steel Co. and Fuji Iron & Steel Co. It reigned as one of the world’s top three steel companies from 1970 to 2008 before Chinese mills and Posco (005490) overtook the Japanese steelmaker in 2009, pushing it to sixth place globally.

Posco became the first non-Japanese steelmaker to join Toyota Motor Corp. (7203)’s closest suppliers this year, rivaling automotive steel sheet producers in Japan.

Nippon Steel & Sumitomo Metal should secure contracts from local steel users in the targeted markets to broaden customers as Asian rivals step up efforts to expand in growing economies, said Jiro Iokibe, an analyst at Daiwa Securities Co.

“The new company should have a marketing strategy that doesn’t stick too closely to historic ties with its domestic customers,” Iokibe said.

R&D

Nippon Steel & Sumitomo Metal will allocate 800 workers and about 70 billion yen a year on research and development, more than any of its competitors, Muneoka said in the interview.

“For a manufacturer, the basis is to hold the top level of technologies related to steel in all fields, including production, product development, R&D, energy conservation and environment,” he said.

Nippon Steel and Sumitomo Metal together produced 46.1 million metric tons of crude steel in 2011, according to data compiled by the World Steel Association. The two companies held a 43 percent market share in Japan and 3 percent worldwide, lagging behind only Luxembourg-based ArcelorMittal (MT) in global terms.

“On the first day for the new company, we’d like to begin by sharing with you that we are in a very tough business environment,” Muneoka told his staff today.

To contact the reporters on this story: Masumi Suga in Tokyo at msuga@bloomberg.net; Yasumasa Song in Tokyo at ysong9@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net


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