TOKYO The announcement by Japan's largest
electric furnace operator, Tokyo Steel Manufacturing Co. Ltd.,
that it would slash its prices by up to 38 percent sent
shockwaves through the Japanese steel industry, with other
steelmakers, trading houses and customers all struggling to
work out the long-term implications of the move.
The company said that effective with November shipments it
would reduce rebar by 38 percent to 57,000 yen ($578) per
tonne; H-beams by 30 percent to 83,000 yen ($842) per tonne;
and hot-rolled sheet by 26 percent to 72,000 yen ($731) per
Tokyo Steel, which implemented its first across-the-board
price reduction in more than three years for September
contracts after scrap prices began to decline in August, said
that its latest move was justified by the collapse of ferrous
scrap raw material prices to as low as 18,000 yen ($183) per
tonne from close to 70,000 yen ($711) per tonne in
It added that it would be more effective to try to establish
a bottom to the market by cutting prices in one aggressive move
rather than slowly reducing them over a period of months.
Tokyo Steel's major rivals, such as Nippon Steel Corp. and
JFE Steel Corp., played down the significance of the move,
insisting that demand for many of their products remained
"We had been expecting Tokyo Steel to cut prices, but to be
honest they were larger than we expected. However, it's all
about supply and demand for individual products and we are
actually looking to increase prices of many of our products,
not cut them," an executive at one major blast furnace operator
Nevertheless, Tokyo Steel has a clear advantage in
production costs over its blast furnace rivals, which earlier
this year were forced to pay record prices for coal and iron
ore, making it much easier for it to cut prices.
"Blast furnace operators are handicapped because their raw
material costs are settled in annual contracts. Tokyo Steel, on
the other hand, has much greater price-adjustment power because
its raw material costs are largely based on current market
prices. While this can be a disadvantage when scrap prices are
high, it's a massive advantage when prices fall," a Tokyo-based
steel industry analyst said.
He added that Tokyo Steel is likely to continue to benefit
from low scrap prices. "I cannot see scrap prices recovering
anytime soon, especially with EFs in South Korea and Taiwan-who
are major purchasers of Japanese scrap-cutting back on
In the first eight months of this year, Japanese scrap
exports posted a year-on-year decline every month bar one, with
August exports falling to their lowest level in more than two
years, according to data from the Japan Ferrous Raw Materials
Association. Indeed, a recent export auction by scrap dealers
in the Tokyo area was cancelled for the first time in years due
to a complete lack of bids from overseas buyers.
Tokyo Steel has always been considered something of a
maverick by Japan's steel industry. While the general consensus
among Japanese steelmakers is that the best way to adjust to
demand has been to control production, Tokyo Steel often has
used pricing as its main tool.
Indeed, the company rose to prominence in the late 1980s
when it waged a bitter "H-beam war" against industry leader
Nippon Steel. The feud turned so acrimonious that Tokyo Steel
left the Japan Iron and Steel Federation. But it also propelled
the company from a mid-sized regional player into Japan's
largest supplier of H-beams.
Nevertheless, with increasing signs that the financial
crisis could grow into a wider global growth recession
affecting Japan no less than other countries, Tokyo Steel may
well find that reducing prices alone will be insufficient, and
that it also will have to reduce output.
"Tokyo Steel's big handicap is that it is strongest in the
areas that are showing the weakest demand. This is particularly
true of the construction sector, which continues to be in the
doldrums ever since the government implemented tighter building
standards last summer," the Tokyo analyst said. "Indeed, the
outlook for the sector is going from bad to worse."
The steelmaker has been trying to expand its product line-up
to reduce its dependence on the construction sector and is
currently building what will be the world's largest electric
furnace, which will be almost entirely dedicated to producing
automotive sheet. However, the 2.5-million-tonne-per-year
plant-which will boost Tokyo Steel's total capacity to 6
million tonnes per year, making it Japan's fifth-largest
steelmaker ahead of Nisshin Steel Co. Ltd.-is not slated to
come online until late next year.
"Until then, Tokyo Steel will struggle, although its
cash-rich position combined with the continued weakness in
ferrous scrap prices will provide the company a cushion of
sorts and allow it to reduce output and cut prices further if
need be without totally devastating it. Clearly, this will give
it an advantage over blast furnace steelmakers who are saddled
with fixed costs," the analyst said.