NEW YORK There was no
escaping the urgency in Shoji Muneokas words as he
delivered a New Years message to some 30,000 employees of
the newly merged Nippon Steel & Sumitomo Metal Corp.
Muneoka, chairman and chief
executive officer of the worlds second- or third-largest
steelmakerdepending on whose arithmetic you
believeurged workers and management alike to "break
through the remaining walls between both companies" and capture
every ounce of competitive advantage inherent in the ongoing
integration and restructuring of what prior to Oct. 1, 2012,
stood separately as Japans largest and third-largest
steelmakersand to do it quickly.
"The situation is dire," he
said, citing the body blows delivered by "the so-called
sextuple whammy" on Japans economy in general and the
countrys steel sector in particular. On a macro scale,
the island nation is wrestling with challenges ranging from an
electric power supply problem and the appreciation of the yen
to a trade balance that "is expected to become vulnerable to
repeated deficits soon."
At the same time, Japanese
steelmakers, which together produced 106.46 million tonnes of
raw steel in 2011, face unsettling changes in market structures
at home and offshore.
Besides a drop in demand for
construction, Japanese manufacturers are accelerating a shift
to overseas production and local procurement from overseas
suppliers, Muneoka said. "As a result, it will be difficult for
Japans domestic steel demand to recover from around 60
million tonnes per year to previous levels of 80 million
Meanwhile, Japans export
markets have undergone an even more dramatic change. "Japanese
steelmakers used to have an overwhelming presence in the ASEAN
(Association of Southeast Asian Nations) market (Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines,
Singapore, Thailand and Vietnam) but are now suffering from
severe competition with Chinese and other emerging makers in
the middle-grade category," Muneoka said. "Moreover, Chinese
and (South) Korean competitors have entered the high-grade
category for galvanized products, tinplate, electrical steel
sheet and seamless pipe, and have caused a sharp decline in
prices, which makes it hard for us to secure profit."
Perhaps more than any other
factor, mounting competition leading to deep structural changes
in Japans all-important export markets and increasingly
lackluster prospects at home spurred and ultimately sealed the
merger of Tokyo-based Nippon Steel Corp. and Osaka-based
Sumitomo Metal Corp. "Basically, a mutual understanding over
the difficult state of the market was the trigger point,"
Shinya Higuchi, representative director, executive vice
president and member of the board of directors, told
AMM in an interview from NSSMCs headquarters in
Tokyo. "To overcome that, the two companies had to join."
Four months after the official
completion of that merger, NSSMC is racing to identify and
capture any and all efficiencies that can be recouped from a
rapid, top-to-bottom restructuring. "We are determined to
change wherever we need to change through integration," Muneoka
told employees in his New Years message. "We must
immediately reform our structure and practices in
profit-making, financial areas and manufacturing."
Tasked with helping fast-track
the means to those ends, 59-year-old Higuchi, a career-long
employee of Nippon Steel, will call on almost four decades of
experience he has accumulated in sales administration and
planning, global marketing, machinery and materials
procurement, and project development around the world to
NSSMC-style doesnt automatically translate into capacity
cuts. "Actually, we are not thinking of reducing capacity
itself as a whole," Higuchi told AMM. "As a joint
company, we are thinking of maintaining our sales volume. But
to keep our sales volume we dont need the current
capacity, especially downstream. By achieving some increases in
efficiency, we can increase output."
NSSMC is relying on what it
calls a "top-runner" system to evaluate and determine which
approach among the merged companys technology pool
promises the best return in terms of higher efficiency. "If
Sumitomo has a better technology, we can take that approach and
apply it to Nippon Steels former plant," Higuchi said.
"Those things are under way and will proceed until the end of
March. It will take five or six months, and after that we will
make the streamlined plants of the new company and adopt a new
Higuchi, who is in charge of
exports for NSSMC, is intimately aware of the battle under way
to capture the steel demand growth promised by the ASEAN
market, the stiffest competitionKoreas Posco
Ltd.in pursuit of that market, and the strategic
strengths and weaknesses of the players involved. "They have
money, they have human resources, they have technological
capabilities, they have everything," he said, enumerating
Poscos strengths. "But they do not have a big customer
base. That is our only advantage."
The NSSMC executive cites a key
case in point: the automotive industry. "Japan has a big
customer base," Higuchi said, pointing to Toyota Motor Corp.,
Nissan Motor Co. Ltd. and Honda Motor Co. Ltd. "The Koreans
have only Hyundai Motor (Co.)." He pointed out that more than
90 percent of the cars produced in Indonesia carry a Japanese
brand name. "So if they (Posco) go into the cold-rolled sheet
market, it might prove difficult for them," he said.
"Our strength is having a
broader base of good, strong customers," Higuchi reiterated,
noting that although Korea also is home to large electronics
companies, such as Samsung Group and LG Electronics Co., those
companies arent very strong in consumer hard goods such
as appliances. "They are big in tablets and TVs. But Japanese
appliance companies have strengths in washers and
refrigerators. ... That kind of product uses more steel than a
Competitors in one arena but
collaborators in another, NSSMC and Poscos relationship
is complicated. Since signing an alliance agreement in 2000,
the two companies are said to have benefited mutually in areas
ranging from research and development and technology exchange
to raw materials procurement. They also are partners in Posco
Vietnam, Southeast Asias largest cold-rolling mill, with
Posco owning 85 percent of the operation and NSSMC the other 15
"We collaborate on basic
research in areas such as iron-making, but we are competitive
in finished products for markets," Higuchi said. So
competitive, in fact, that prior to the merger Nippon Steel
took Posco to court in both Japan and the United States, where
it filed a suit last April seeking damages and an injunction
against the manufacture and sale of grain-oriented electrical
steel sheet by the big Korean steelmaker. The action was taken
under the Unfair Competition Prevention Act based on
allegations that Posco illicitly acquired and was using Nippon
Steels trade secrets.
With growth in domestic steel
demand stymied, NSSMC is counting on three end
marketsautomotive, energy and constructionand the
emergence of the ASEAN markets to fuel its future. And it has a
powerful ally in the Japanese auto industry, which in the first
three quarters of 2012 saw local and overseas auto production
jump 21 percent to nearly 12.04 million vehicles compared with
the same period the previous year.
Close ties between Japans
auto and steel industries is nothing new. And while that bond
almost certainly accounts for the reported interest on the part
of NSSMC (in partnership with Luxembourg-based ArcelorMittal
SA) and JFE Steel Corp. (in partnership with Pittsburgh-based
U.S. Steel Corp.) in bidding for ThyssenKrupp AGs
ill-fated Steel Americas unit, the future belongs to Asia,
where China, Japan and Korea are duking it out for market
Late last year, NSSMC and
Indonesias PT Krakatau Steel Tbk (PTKS) agreed to conduct
a detailed study to jointly launch a business to manufacture
and sell automotive flat steel products in Indonesia. The
planned venture, to be owned 51 percent by NSSMC and 49 percent
by PTKS, will be located in Cilegon, Banten province, on land
adjacent to the manufacturing base of PTKS. At the time of the
announcement, the two companies said they aimed to enter into a
definitive agreement in the first half of 2013.
Through the planned joint
venture, NSSMC and PTKS intend to meet the demand for
high-grade automotive flat steel products, mainly from Japanese
automakers that have developed their business in Indonesia. The
joint venture also will contribute to the further development
of the Indonesian auto industry.
Elsewhere on the ASEAN
automotive front and prior to the merger, Nippon Steel
established Nippon Steel Galvanizing (Thailand) Co. Ltd.
(NSGT), a 360,000-tonne-per-year continuous galvanizing line
scheduled to begin commercial operation in October this year.
NSGT is being built adjacent to Siam United Steel Co. Ltd., a
consolidated subsidiary of NSSMC that operates a cold-rolling
mill sourced by hot band from the parent company. It will
specialize in the manufacture and sale of hot-dip galvanized
and galvannealed steel sheet.
For all its importance as an
engine of growth, the ASEAN auto market counts as only one of
several consuming sectors and geographical regions in which
NSSMC is investing, either solo or on a joint-venture basis.
The company cited nine projects in a listing of major business
investments issued in mid-February. Of that total, three are
related to auto, three to pipe and tube, two to construction
and oneWinSteel, a tinplate joint venture with Wuhan Iron
& Steel (Group) Corp. in Chinato containers. Three of
the nine projects are in southeast Asia (Singapore, Thailand
and Vietnam), two in Mexico and one each in the United States,
Brazil, China and India.
Mexicos prominence in the
list is a direct reflection of that countrys burgeoning
auto industry. "Mexico is becoming a more and more important
production base for Japanese, American and European carmakers,"
Higuchi told AMM. "Almost everybody is locating a
plant there to manufacture cars for the Mexican market or for
export to the United States and elsewhere."
NSSMC, which has been supplying
hot-dip galvanized and galvannealed sheet to Japanese
transplants in Mexico, formed a joint venture with Ternium SA
several years ago to manufacture and sell hot-dip galvanized
and galvannealed sheet to Mexicos automotive market.
The plant near Monterrey, in
which NSSMC holds a 49-percent stake, will operate under the
name Tenigal SRL de CV. It will have an annual production
capacity of 400,000 tonnes when its completed this
summer. Plans call for sourcing cold-rolled sheet from
Terniums newly invested pickling line and tandem cold
mill (PL-TCM), which also will be completed this summer.
Mexico produced some 2.6 million
four-wheeled automobiles in 2011, and its on a fast track
to produce more. "Mexico had been usually the No. 9 (auto)
producer in the world," Jose Valls, president of Nissan
Mexicana SA de CV, said in a company-sponsored video blog
posted last July. "Now we are No. 7. We used to be the No. 9
exporter in the world; now we are in fourth place, soon third
place, in the world as an export hub."
In a move to capture that
growth, NSSMCthrough Nippon Steel, Sumitomo Pipe &
Tube Co. Ltd., Sumitomo Corp. and Metal One Corp.set up a
joint venture last August to manufacture and sell automotive
steel pipe and tube. Nippon Steel Pipe Mexico SA de CV is
scheduled to begin production in June, supplying products to
Japanese, North American and European automakers and auto parts
manufacturers in Mexico. The facility, in Silao, Guanajuato
state, has a rated output of 2,000 tonnes per month.
While developing economies
account for the bulk of NSSMCs investment
outlaysand are the epicenter of anticipated
growththe U.S. remains "very important" to NSSMC, Higuchi
told AMM. "First of all, the American economy is
growing. That is quite different from Japan, where the
population is aging and declining. Then there are the Japanese
automotive transplants, which focused our efforts on joint
ventures with local partners to supply Japanese companies
manufacturing cars in the United States."
NSSMC, through Nippon Steel, is
a partner with ArcelorMittal in I/N Tek and I/N Kote,
cold-rolling and hot-dip galvanizing and electrogalvanizing
lines in Carlisle, Ind.
"There is also a need in the
United States for sophisticated products," the NSSMC executive
said, citing high-performance rail. "The best, most advanced
rails are being supplied to American railways like Union
Pacific (Corp.) and CSX (Corp.) from Japan. The requirements
call for heavy-duty rails that can stand up to the challenges
of supporting high loads under difficult conditions. ... Our
highest-quality rails are mostly supplied to American rail
carriers going over the Rocky Mountains and mining companies in
the United States, Canada, Brazil and Australia."
Looking ahead, NSSMC is banking
on the expanded scale, technological savvy and pool of
innovation skills resulting from the merger to sustain its
future. Strategic acquisitions and investments will continue to
play a role, as will expansion into new geographic markets.
"Basically, what we have been
doingand what we will continue to dois buy raw
material sources if they are of good quality, such as in
Mozambique, and are available at a relatively good price,"
Higuchi said. "We are searching many opportunities in raw
materials. We are also thinking of establishing downstream
works or facilities in Asian countries and some growth markets
like Mexico, and maybe even South American countries."
At the same time, NSSMC is
eyeing opportunities in Africa and the Middle East. "Kenya,
South Africa and Nigeria are a big market for roofing
materials, so we are exporting hot-rolled coil there. They (a
joint-venture partner) corrugate, galvanize and sell it as
roofs," Higuchi said, adding that NSSMC also has participation
in a galvanizing mill in the United Arab Emirates. "So we see
the Middle East and African markets as holding growth potential
In what might prove to be one of
the smartest investments going forward, Nippon Steel laid plans
last August to purchase 50 percent of BlueScope Steel
Ltd.s equity holdings in 14 operating entities in
southeast Asia and the United States and organize them into a
50-50 joint venture. The transaction was said to be valued at
$554 million, with the arrangement calling for Nippon Steel to
participate in the management of the venture as well as supply
it with substrate (hot-rolled and cold-rolled coil) for hot-dip
galvanized sheet on a stable basis. Included in the package are
hot-dip galvanized sheet and painted sheet businesses in
Indonesia, Malaysia, Thailand, Vietnam and the United States
(Steelscape Inc., Kalama, Wash.), and roll-formed building
products businesses in Brunei, Indonesia, Malaysia, Singapore,
Thailand, Vietnam and the United States (ASC Profiles Inc.,
West Sacramento, Calif.).
"What is unique about the joint
venture with BlueScope is its focus on flat-rolled product for
construction use. ... Formerly, most of our transplant
shipments were for automotive and tinplate, where we have a
technical advantage vs. others. But people regard Nippon Steel
and Sumitomo as not having a big advantage in construction
steel against Posco, Taiwan and the Chinese mills," Higuchi
said. "Now, in a real sense, we have an advantage."
Higuchi said BlueScope has a
very large customer base. "They have their own brand of coated
and colored sheet, and they also have a factory for
manufacturing building components. Their customer base is
probably more than 10 times the former Nippon Steel customer
base for flat-rolled construction products," he said.
"We bought their customer base,
their processing units and time," he said, emphasizing "time,"
which these days is very much of the essence at NSSMC.