Forget everything you ever knew about the Japanese steel industry.
In the dozen years since the Asian financial crisis, the world economy and, more specifically, the epicenter of growth in global steel consumption has tilted to the East. The dramatic growth in steel consumption in China, Indonesia, Malaysia, Thailand and South Korea present both an opportunity--and steep challenge--to Japans steelmakers, one that has forced the sector to rethink its competitive strategy as it relates to battling for market share on the industrys home turf as well as doing business in North America.
In early September--and only weeks before the milestone merger of Nippon Steel Corp. and Sumitomo Metal Industries, representatives of the U.S.-based Japan Steel Information Center exchanged views with AMM Inner Circle on the depth of those changes and their influence on the future direction of their parent companies and the Japanese steel sector as a whole. Pull up a chair and join the discussion.
Inner Circle: Do you see evidence of a so-called manufacturing renaissance in the United States spurred by the game-changing attributes and energy economics of shale gas? Would such a resurgence change your thinking regarding the Japanese steels industrys tilt toward Asia to pursue future growth?
JFE Steels Okamoto: Obviously low energy cost is a benefit. It is a benefit to the manufacturing base. But that is not the only cost input. One should try to look at this in a broader sense. But definitely a low energy input cost of any source is a benefit to the manufacturing sector.
Trade attorney Dan Porter: If I can add this, you look at where the Japanese appliance companies, auto manufacturers are investing. It is not just cost. It is where are the parts being consumed. And the Japanese producers like as much a possible to have production as close to their customers as possible. So, when they decided to invest in Asia, it is because they perceived a longer-term consumption in that part of the world. Your question is interesting, of course because at the time they made (the decision), there was increased consumption of the products and the perception was there was also lower-cost manufacturing in that part of the world. Your question says that may be now something that is different at least in respect to U.S. manufacturing. I think though that just looking at per capita growth in other parts of the world still is higher in Asia so you would expect to have more finished goods consumption in Asia. So, it begs the question where (are) those goods going to be consumed and produced? I think the Japanese made the decision to invest there (in Asia), they assumed that would be a good decision.
Inner Circle: Historically, steel producers have followed automakers into regional markets. Way back when, that linkage was referred to under the rubric of Japan Inc. Now, your automakers are looking at sourcing steel from outside Japan. Has the idea of Japan Inc eroded? What are the longer-term ramifications of that erosion?
Nippon Steels Aoyama: To some extent, yes you are right to say that. And to some extent, no. Speaking about Nippon Steel, way back to the 80s there were huge trade wars in terms of automotive between Japan and the United States. And in order to cope with such situations, many Japanese automotive companies like Nissan, Honda, Toyota established transplants, production sites in the United States. Initially they thought they could produce their car by using domestic-available steel. But they found difficulty because of (the) difference (in) the way of thinking or whatever. Consequentially, they asked the Japanese steel industry to build a steelmaking facility in the United States but building a blast furnace mills is a huge, huge cost. Instead of that, all of us choose to establish joint ventures. In (the) case of Nippon Steel, we chose to establish a joint venture, which is producing flat rolled product with Inland Steel. And now our partner is Arcelor Mittal in the United States. We transferred our technologies to that joint venture to serve better not only Japanese OEM but mainly our partners. And our operation in the United States has been running for more than 20 years. Likewise not only the United States but in Mainland China, we established a joint venture with Baosteel. In Brazil, we established a joint venture with Unigal. In such a way localize our production in the market. So what you mentioned, partly yes, partly no.
Inner Circle: With this possible resurgence of manufacturing in U.S., do you anticipate making more investments here? In joint ventures or looking to expand in different ways.
Nippon Steels Aoyama: Relatively speaking, in the United States, more and more projects are coming. It is true. In order to supply growing automotive production, they need more good steel. But compared to the emerging market all over the world, like Southeast Asia, Mainland China or on the American continent, like Mexico, I should say, that although we expect modest growth in manufacturing in the United States, the pace of the growth is far bigger than in the emerging markets. For example, in Mexico now, almost every month, a new project or production line or parts for automotive is announced. Once again, yes, in the United States, the growth potential is recovered. We see some opportunities in that. But, in the case of Nippon Steel, we are trying to realize such opportunity through joint ventures, like expansion of production capacity of joint ventures.
JFE Steels Okamoto: We are not trying to negate anything about North America. But we are trying to illustrate that there are more opportunities and actual growth in the Asian regions in comparison to this part of the world.
Inner Circle: Would it even make sense to leave partnerships in the U.S?
Nippon Steels Aoyama: We are here to stay in the United States.
JFE Steels Okamota: Those investments have a purpose. There is a certain customer base. There is no reason to leave.
Nippon Steels Aoyama: Mills in the United States mainly produce for the American market. An automotive plant, say in Mainland China, is serving for the Chinese market.
Inner Circle: How would you describe the relationship between the Japanese steel industry and the Chinese steel industry? How much Chinese material is coming into Japan? Is that a concern? Are they chasing you upstream?
Nippon Steels Aoyama: There are only a few steel companies in Mainland China that can produce the high-end products. Of course, next ten or twenty years, the number of such companies is increasing. The relationship between the Chinese and the Japanese steel industries is we are competing with each other. All of them cannot produce the high end product where we have a strong advantage. Our strategy, as a whole, is to try to differentiate ourselves as much as possible. For example the Japanese auto companies, not only Japan but GM and Ford in Mainland China, they choose at least right now, as of today, to use Japanese material or, product made by joint ventures with Japanese. So, in such a way, we try to differentiate. Speaking of that, there is no room for us to compete in commercial grade product, such as rebar, with the low-cost producers in Mainland China. Also, we observe imports from Mainland China to Japan, is gradually increasing. But, once again, because of the difference in the quality of the product, Chinese producers have some difficulty (increasing) their imports to Japan.
Inner Circle: Do you see those products moving more into value-added?
Nippon Steels Aoyama: Of course, they would like to produce more value-added products. Because of that, the intellectual property issue is very, very crucial for the Japanese steel industry. For example, Nippon Steel has a joint venture with BaoSteel. Baosteel is top integrated steel mill in Mainland China. Even with them, we limited the technology, which we can transfer to them. In other words, we try to keep top of top technology and know-how in a black box. In such a way, we try to keep our competitiveness.
Inner Circle: You can only push so far up the ladder in value added with Chinese chasing you. What happens when they catch-up?
Nippon Steels Aoyama: To cope with such a situation, what we can try to do is develop even more advanced materials faster than they do. That is the only way to keep the advantage.
Inner Circle: Does that mean pumping more money into R&D?
Nippon Steels Aoyama: Yes, We have been investing continuously.
JFE Steels Okomoto: R&D expenditures are very important to Japanese steelmakers.
Inner Circle: Is that investment targeted mostly at automotive steels or are you focusing on other market sectors such as aerospace?
JFE Steels Okamoto: I do not know the exact number but the majority is aimed at the automotive sector. I think if you look at who consumes steel, youll see that it is important for us to serve that industry. Not that we dont spend any money on construction. But we place more emphasize on the automotive sector.
Inner Circle: How big can China become? Do you see Chinas continuing to be the worlds leading market tonnage wise?
Nippon Steels Aoyama: Considering the size of demand in Mainland China, considering the size of production capacity in Mainland China and considering the closeness of Japan to Mainland China, of course, we feel the presence and growth of the Chinese steel industry. We cannot cry about that. We have to compete. We have to find a way to live with that. Of course, we hope that some reasonable way of business should be done among the Chinese steel industry. For example, the environmental issue.
Inner Circle: In terms of moving into higher value-added products, would you even consider going into high performance aerospace alloys, high-nickel alloys?
Nippon Steels Aoyama: I suppose it depends on the company. In the case of Nippon Steel, this sector of the industry is very value-added. At the same time, the total quantity is very small. So, in the case of Nippon Steel, we have a specialized company that produces this type of material. Our production facilities are not sized to produce such a specialized material in small quantities.
Inner Circle: Mention Russians/shipbuilders, their presence in China. Adds another factor to the mix.
JFE Steels Okomoto: The global steel industry is becoming more and more integrated. Its not a regional commodity in general. Yes, you will see more competition. Russia is less of a factor than say the other competitors such as Korea and China.
Nippon Steels Aoyama: And Japanese manufacturers have a very, very strong incentive to use imported material if they can because of the super appreciation of the Japanese yen. The Japanese steel industry is facing very, very tough competition even in the domestic market in Japan.
Nippon Steels Aoyama: Due to the quality. In general, the quality of Chinese steel is not high enough for Japanese manufacturers to use. So, there is no incentive, today, for Japanese manufacturers, for example Toyota, to use Chinese material. But, if China can increase the quality, maybe Toyota would be very, very happy to use imported material. Because the Japanese yen has appreciated very much.
Inner Circle: What about Korean material?
Nippon Steels Aoyama: Material produced by specific Korean mills is getting closer in quality, they are getting upstream. (I have never heard of) Russian material.
Inner Circle: What is your take of the U.S. market right now? How do you view the American steel industry?
Nippon Steels Aoyama: The majority of the flat-rolled, hot-rolled cold-rolled, even now galvanized material, produced in the U.S. is done by mini-mills, not by blast furnaces. In Japan, due to high energy costs, blast furnace-based mills account for the majority of the flat-rolled steel production. That is one very significant difference. Because of that, the price of flat-rolled product in the U.S. is closely linked to the price of scrap. In Japan, there is not such a correlation.
Inner Circle: Do you see further mini-mill growth or the emergence of new modes of steelmaking in Japans future?
Nippon Steels Aoyama: Several conditions are required to support a big mini-mill industry. You need an ample of scrap, competitive electricity costs, and high technology to accommodate that. Due to the lack of competitive energy costs, I dont think Japan will see the same kind of development or an expanding presence of mini-mills. The cost structure is much different.
Inner Circle: How have you dealt with what some have described as the hyper-volatility in iron ore and coking coal prices? Have you rejiggered your strategy in raw materials?
JFEs Okamoto: Its no secret raw material prices are volatile, much, much more volatile than they have been in the past. As much as we would like to see stable pricing in raw materials, unfortunately, that has not been the case. We do not have the luxury of the annual pricing any more. Prices fluctuate much much more frequently. Our first objective is to try to secure an adequate and stable supply of our own raw materials to support sales of our product to our customers. That is why JFE and I would assume the other steel companies in Japan have been investing in the raw materials supply base. That challenge is probably going to increase going forward.
Nippon Steels Aoyama: On top of that, we in the Japanese Steel industryÑnot only the Japanese steel industry--but blast furnace operators, in general are very picky users of coking coal and iron ore. We prefer having the best quality of iron ore, the best quality of coking coal because high quality raw materials improves productivity. But given the very, very volatile pricing of iron ore and coking coal, we are now trying to use inferior qualities iron ore or coking coal. Of course, we know that to do that, we need new technology. So we have made a huge investment in research activity keyed to utilize the lower-quality raw materials.
Inner Circle: Has that reseach been successful?
Nippon Steels Aoyama: To a degree, yes. In the United States, you have low-cost natural gas, shale gas available. So producing direct reduced iron using natural gas is feasible here.
Inner Circle: Given the many challenges Japanese steel mills face, from the appreciation of the yen to high energy costs and intense competition from your Asian neighbors, can you really compete in commodity grades? Are you going to give up commodity grades to survive?
JFE Steels Okamoto: We cannot give up anything.
Nippon Steels Aoyama: In the Japanese domestic market, we supply not only high end, high value-added products but also commodity grades. But we face very serious competition in the commodity market in the form of material from Korea and Mainland China. To meet that challenge, we not only supply the material but also try to give customers some solutions to the market challenges they face. For instance, we may advise on how to design a project or suggest a better way to use our material. In that way we try to add some value even for commercial grade material in the domestic market and compete with imported material. We are not in a position to say, okay, we can give up the commodity grades.
Trade lawyer Dan Porter: There is always a home-field advantage for domestic producers. Consumers are never going to totally outsource and opt for imported material. They are always going to have a fairly heavy reliance on domestic material. You are never going to see anyone go against a domestic supplier totally in favor of imported material. There is always going to be a premium paid for domestic material.
JFE Steels Okamoto: And every day we are seeking ways to cut production costs. Thats an ongoing effort, every single day at the mill. This is not going to end. We are going to try to do that and be as competitive as we can in the whole sector of the product line.
Nippon Steels Aoyama: I can say that not only the steel industry but also our customers, the automotive industry, for instance, is facing the same kind of challenge. So, they have to differentiate themselves by using our materials. Toyota is not going to compete with Tata. They need to differentiate themselves.
Inner Circle: The U.S. government has imposed anti-dumping duties on a variety of products, a number of which have served to prevent deeper penetration of the domestic market by Chinese material Have you been successful with similar measures against Chinese material?
Nippon Steels Aoyama: There are no import duties imposed on material imported from anywhere around the world into Japan. In the Japan Steel Federation, we have had internal discussions regarding possible measures in the event anti-dumping activity is observed. Such types of discussions have gone on. But, to the best of my knowledge there is not yet any single case filed against China.
JFEs Okamoto: It definitely would be an option, yes.
Inner Circle: Is there any type of product, in particular, you are concerned about?
JFEs Okamoto: Every product
Inner Circle: Imports arent the only threat you face. The competitive materials arena is alway simmering. How much of a threat do you see aluminum posing?
JFEs Okamoto: Steel is still a very, very economical material. If you are building a Ferrari or some fantasy, super high-priced car, it makes sense to opt for another material. But the choice has to make sense economically. We still think that steel has many more advantages versus other competitive materials.
Nippon Steels Aoyama: We are doing so-called benchmarking, tracking, for example, steel vs. aluminum as a product, on a cost and/or a performance basis. It is true that the performance of aluminum is improving. It is also improving in terms of cost competitiveness. By doing constant benchmarking, we try to set a new target for all materials.
Trade Lawyer Matthew McCullough: In Japan, there is a huge market for tin beverage (cans) rather than aluminum in the U.S. And thats all a matter of innovating, research and development.
Inner Circle: With RG Stel shutting down, are any Japanese companies looking at the tin mill market in the U.S? RGs exit leaves only two domestic tin producers, U.S. Steel and Arcelor Mittal here. The possibility of the United Steelworkers strike at those mills sparked discussions centering the need for more imports of tin mills products into the U.S.
Trade Lawyer Matthew McCullough: Well give you the address of the Trade Commission, where you can raise those points. Unfortunately, despite the best efforts of foreign mills, the ITC failed to remove the duties.
Trade Lawyer Dan Porter: Thats the problem with these trade cases. The world changes. Things happen. There are weird situations where there may be bonafide shortages. Talk to the can companies about that. They tried very hard twice in the last ten years to get rid of these anti-dumping duties.
Inner Circle: What other Japanese products are up for review:
Trade Lawyer Matthew McCullough: I think there is a welded pipe that starts in October. Clad-steel plate in December.
Inner Circle: How do the Japanese mills view see the American electrical steel markets. Do you still see electrical steel as a growth market?
Nippon Steels Aoyama: As you know, the electrical steel, the grain-oriented steels had been under antidumping duties for ten years. A few years ago, that was revoked. But even after that, we tried to find a customer who could recognize the difference between Japanese and other material. Differentiation can be done by using Japanese materials. In Japan, Nippon Steel and JFE both produce a grain-oriented steel. We are trying to find customers, who want to differentiate themselves and their products by using our material. There is a good base in the U.S. for us to find a company.
JFEs Okamoto: There is a growing concern about energy efficiency. Through legislation, the U.S. Department of Energy is now trying to make certain types of transformers more efficient. The question is to what degree will they be able would they be able to do that without jeopardizing the supply of the transformer and the material that goes into the transformer. Depending on the outcome, it definitely would benefit the Japanese producers because we do produce a better product.
Inner Circle: In what way did the devastating earthquake and subsequent tsunami impact your supply chain strategy and infrastructure and disaster backup plans
Nippon Steels Aoyama: Nippon Steel supplies our product to many customers. In some cases, only one location, or one specific mill could produce that product. Internally, we tried to achieve dual sourcing or insure several facilities could produce the product. At the same time, externally, many customers asked us to establish dual-supply sources. For some customers, dual supply --in their terminology--doesnt mean that okay Nippon Steel can produce this material here and there. It means Nippon Steel and other companies can supply the product. So, we are facing this type of new challenge to the supply chain programs as a result of the tsunami.
Inner Circle: On the flip side, we have been reading about reams of red tape and bureaucratic delays impeding reconstruction. Does that square with your perception of the pace of recovery in Japan?
Nippon Steels Aoyama: When you consider how wire rod mill (JFE). The town, community, village devastated. Although the main infrastructure has already been rebuilt, the village itself has not yet undergone reconstruction. Personally, I am very frustrated and the people over there are very frustrated. I dont know that red tape is the only factor. Of course, in order to rebuild the town, they need a master plan to prevent the same kind of thing happening in the future. I am not an expert in that kind of thing but I believe it takes time for such a master plan to be developed.
JFE Steels Okamoto: But we do see the growth in public spending finally coming out. Nothing is perfect. People are trying to do their best. Obviously, this takes time. And with the vast area and the vast amount of damage the earthquake caused, it is not going to be easy. The government is doing their best. Things could always be better but we are seeing growth in the public spending and that is due to the budget that is allocated for these matters.
Inner Cirlce: Does the Japanese steel industry have a position on steel futures?
JFE Steels Okamoto: You have to ask that question. We, I shouldnt say we, JFE does not think that steel futures is a viable option from our point of view.
Inner Circle: Why not?
JFE Steels Okamoto: The price of steel should be determined by the market, supply and demand, and futures, we believe, would just bring in more volatility.
Inner Circle: How do you think your customers feel?
JFE Steels Okamoto: As far as our customers are concerned, I think they are okay with how we treat them.
Nippon Steels Aoyama: I share Okamoto-sans view. In the case of nonferrous material like silver, copper, gold 99.999999 percent of the material is that metal. But with hot-rolled steel, there are differences in the properties of the material. It is rather difficult to represent the material itself. That is why the Japanese steel industry, not only the Japanese steel industry but also ArcelorMittal, think alike. The reason for that is steel is a very difficult material to develop a representative specification or standard for.
Inner Circle: More broad-based, Bigger picture, what is the steepest challenge facing the Japanese steel industry today?
JFE Steels Okamoto: We are facing many, many challenges. Not only with our competitors in the market but also business conditions are quite difficult. Somebody mentioned energy costs. The energy costs of Japan vs. what we see around the rest of the world is relatively high. Somebody mentioned exchange rates. The exchange rate is very tough now for any Japanese manufacturer. I personally think the Yen is way over valued at this point given the state of the Japanese economy as a whole. Obviously, it is a continuous battle to try to compete with our international competitors. What we are trying to do is separate ourselves by product in terms of how we do business and how we interact with our customers. We hope this is the right course and I truly believe that this is the right track for success.
Inner Cirlce: Mr. Okamoto, you served an earlier stint in the U.S. about ten years ago? Looking back, how how has the landscape changed compared to what you ae dealing with today?
JFE Steels Okamoto: In general, not much has changed in the way we conduct our business but what we offer to the customers has significantly changed. We definitely have better product. The customers are leaning more and more toward the high value-added special products that we produce. Thats why we have a role to serve, to bridge our production and marketing people in Japan to customers here in North America.