TOKYO — Caught in a blistering crossfire, Japan’s top and third-largest steelmakers are revisiting a formula that transformed that nation’s sector from a war-torn industry in the mid-1940s into a global steel powerhouse three decades later.

Newly merged and almost 40 years after what some consider a peak year for the Japanese steel industry in 1973, Nippon Steel & Sumitomo Metal Corp. (NSSMC) today finds itself in the midst of a battle as heated as either faced alone.

The combined entity is counting on pure size (economies of scale), technological prowess and a carefully focused drive into select downstream joint ventures with local partners in key emerging markets to answer the competitive challenges posed by upstart mills in China, South Korea and Taiwan. NSSMC, along with Japan’s other major integrated mills, is waging what might be called the War for the East and the growth in steel consumption that the region promises against a backdrop of a slumping global economy abroad and 10 years of deflation, a stubbornly high yen and political dysfunction at home.

Based on 2011 crude steel production data from the World Steel Association, the Nippon Steel Corp./Sumitomo Metal Industries Ltd. merger created the world’s second-largest steelmaker—sporting a combined 45.1 million tonnes, well behind ArcelorMittal SA’s 97.2 million tonnes but a hair ahead of 44.4 million tonnes at China’s Heibei Iron & Group Co. Ltd.

Although officially finalized Oct. 1, 2012, the roots of the merger date back almost a decade, Shinya Higuchi, representative director and executive vice president and member of the board, told AMM in an exclusive interview at NSSMC’s Tokyo headquarters.

By his reckoning, Japan’s steel sector has faced—and so far endured—four major tests of its mettle since virtually rebuilding after World War II.

"In autumn 1973, the first so-called oil shock hit the global economy, and Japanese steel output fell from 120 million tonnes to less than 100 million tonnes," Higuchi said. "That was sort of the start of the steel industry’s difficulties."

The next major challenge arrived in September 1985 in the form of the Plaza Accord, an agreement between the governments of France, Japan, the United Kingdom, the United States and West Germany geared to depreciate the U.S. dollar vis-a-vis the Japanese yen and Germany’s deutschemark by intervening in the currency markets.

"The exchange rate went up, so Japanese steel export competitiveness was suddenly lost," Higuchi said. "Almost at the same time, the Koreans and Taiwanese expanded their capacity. And Posco’s new steel works at Gwangyang came into production at the beginning of 1987. ... So, again, the Japanese steel industry was in a very difficult position and tried very hard to address the situation through rationalization and streamlining of capacity. At Nippon Steel, for example, we shut down four blast furnaces."

Hard times hit the Japanese steel sector again in the early 2000s, with Higuchi calling 2000 through 2002 "very, very difficult years. That time saw the consolidation of major integrated steel mills in Japan." He noted that JFE Steel Corp. was born by the merger of Kawasaki Steel Corp. and NKK Corp., "and Sumitomo Metal went into a very difficult position."

It was the difficulties faced by Japanese mills during that period that led to the formation of a "soft alliance" among Nippon Steel, Sumitomo and Kobe Steel Ltd. to synchronize, coordinate and streamline activities between the three participants.

"It was then that the alliance between Sumitomo and Nippon Steel began," Higuchi said. "After that basic alliance agreement, we made a combination or merger of our sister companies, daughter companies and affiliate companies ... everything except the parent companies. Then finally, in 2011, we announced the merger of the parent companies. So the arrangement has a 10-year history rather than something that was just decided."

For all its history, the marriage ensued at relative lightning speed and its announcement caught even insiders by surprise, despite the pressing economics and market challenges that essentially mandated the deal. Unlike a decade earlier when the "soft alliance" was formed, Sumitomo wasn’t in a difficult financial or market position. But by the start of 2011, not only had the world around it changed but so had the entire Japanese steel industry.

The devastating 2011 earthquake off the Pacific Coast of Tohoku and subsequent tsunami struck March 11, 2011, adding to the sector’s woes.

"In the beginning of 2011, the global steel market was difficult," Higuchi said. "Korea became a net exporter. Before they became a net exporter, China was a net exporter. Everything was difficult. ... In that very difficult environment, it is my understanding that Sumitomo’s top management decided that to compete globally they needed to be a bigger company.

"We (Nippon Steel) apparently were thinking the same. In order to globalize, to take advantage of our technology and ensure access to human resources—we need strong human resources to establish the manufacturing bases outside Japan—we needed to be bigger," he said.

The end result of the companies’ respective quests for scale is what Higuchi calls "a more aggressive-type merger rather than a defensive, no-other-way-to-go merger."

Thanks in large part to shared objectives and a decade-long relationship, no one outside Nippon Steel and Sumitomo Metal was involved in piecing together the final details of the merger.

"It was sort of a rare case," Higuchi said. "We knew each other. Our management felt no need to hire advisors. ... The decision was made solely by four guys—the two former chairmen and two former presidents of the companies. We didn’t even consult with METI (Japan’s Ministry of Economic Trade and Industry). Also, there is a custom to pre-consult, pre-negotiate with the Fair Trade Commission, but this time we didn’t do that. The four guys agreed, they kept their silence. Just before the announcement, even the vice presidents of both companies did not know. We were not informed. So everybody was surprised."

Immediately after the formal Feb. 3, 2012, announcement, NSSMC’s top executives, board members and general managers told customers of the pending merger and, "of course, we went to the Fair Trade Commission and METI," Higuchi said.

The reaction was positive because everybody knew that with reduced demand in the domestic steel market, no one could soundly survive and take the positive and aggressive steps needed to capture growth in local markets.

"Having strong steel companies as a base of the industry, having a company that is capable of producing very good product and having a sound financial base is very necessary for Japan," he said. "So, people very much welcomed the merger. Of course, some customers may have some concerns, let’s say, that Nippon-Sumitomo becomes so big that they might lose their buying power."

Addressing potential concerns of that nature, Higuchi noted that Nippon’s and Sumitomo’s customer bases are "strikingly different. They (Sumitomo) are very strong in pipe and tubes. We are more on flat product. Because it is a good fit, not many customers have a big concern."

There are, of course, other options. "They can buy from JFE and they can buy import," he said. "Unfortunately for Japanese industry, Korean, Taiwanese and even some Chinese quality is becoming better and better, although not as good as Nippon and Sumitomo. That is basically why the Fair Trade Commission in Japan has allowed this merger."

The day NSSMC was officially founded, Shoji Muneoka, chairman and chief executive officer of the newly merged company, and Hiroshi Tomono, president and chief operating officer, set the objective to be "the best steelmaker with world-leading capabilities" by advancing four major initiatives: globalizing the steel business, pursuing and excelling with advanced technologies, cutting costs and strengthening non-steel businesses.

Today, just over three months later, NSSMC is on its way. The company expects to over achieve it’s cost-reduction-through-synergy target—to 200 billion yen ($2.25 billion) from 150 billion yen—by implementing best practices, cost reductions in raw materials transportation, strengthening cooperation among works and other measures. It also expects to generate $3.8 billion in cash by compressing overlapped assets to strengthen its balance sheet and apply that to global investment.

Meanwhile, Higuchi is fully dedicated to realizing the effects of the integration—via focused output, mill specialization, implementation of best available practices, etc.—in the shortest possible time.

"There is an advantage for us, so we have to do it quickly. But in most cases we need approval from customers. We have to explain very carefully to get their approval on that. I am focusing on that. I don’t want to lose the customer on this occasion. To keep the customer is the minimum requirement for us," Higuchi said. "Sometimes, a customer may think that Nippon Sumitomo has too high a market share and bring in other sources. We don’t want to see that. We’d like to talk to the customers and take care of them very, very carefully."