TOKYO Caught in a
blistering crossfire, Japans top and third-largest
steelmakers are revisiting a formula that transformed that
nations 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 Japans 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
worlds second-largest steelmakersporting a combined
45.1 million tonnes, well behind ArcelorMittal SAs 97.2
million tonnes but a hair ahead of 44.4 million tonnes at
Chinas 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 NSSMCs Tokyo headquarters.
By his reckoning, Japans
steel sector has facedand so far enduredfour major
tests of its mettle since virtually rebuilding after World War
"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
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 Germanys
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 Poscos 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
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 wasnt 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 sectors 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
Sumitomos 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
resourceswe need strong human resources to establish the
manufacturing bases outside Japanwe needed to be bigger,"
The end result of the
companies respective quests for scale is what Higuchi
calls "a more aggressive-type merger rather than a defensive,
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
guysthe two former chairmen and two former presidents of
the companies. We didnt even consult with METI
(Japans 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 didnt 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
Immediately after the formal
Feb. 3, 2012, announcement, NSSMCs 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
"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, lets say, that Nippon-Sumitomo becomes so big
that they might lose their buying power."
Addressing potential concerns of
that nature, Higuchi noted that Nippons and
Sumitomos 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
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
its cost-reduction-through-synergy targetto 200
billion yen ($2.25 billion) from 150 billion yenby
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 integrationvia
focused output, mill specialization, implementation of best
available practices, etc.in the shortest possible
"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 dont 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 dont want to see
that. Wed like to talk to the customers and take care of
them very, very carefully."