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Japanese steel sector resets focus, aims high

Keywords: Tags  Japanese steel industry, transition, Japan Iron and Steel Federation, JISF, Nippon Steel & Sumitomo Metals Corp., NSSMC, JFE Steel, Kobe Steel Nisshin Steel


NEW YORK — The official headquarters address of the Japan Iron and Steel Federation might be 3-2-10 Nihonbashi-Kayabacho, Chuo-Ku, Tokyo, but ask any of the 110-plus iron and steel producers, trading companies and trade associations that are members of the organization where they do business daily, and the more outspoken among them will tell you between a very, very large rock and a very, very hard place.

Two decades of deflation, economic stagnation, the Fukushima earthquake, tsunami and nuclear disaster, a persistently strong currency (until the recent advent of "Abenomics," or easing of monetary policy to spur demand, under Prime Minister Shinzo Abe) and three recessions in five years will do that to you.

Add to those challenges declining domestic demand, rising steel imports and aggressive neighboring economies, namely China and South Korea, which are busy expanding their own steelmaking capacity and along the way bridging the technology/quality gap that Japanese mills long enjoyed over their global competitors. In a telling move, Toyota Motor Corp. recently added Korea’s Posco Ltd. to its list of top suppliers. Media reports noted that Posco was the first non-Japanese steelmaker to be added to the list, which is said to represent the top 1 percent of Toyota’s suppliers.

Japan’s steelmakers don’t have a monopoly on tough times, as a quick look at the current AMM price for Midwest hot-rolled carbon sheet ($29.50 per hundredweight, or $590 per ton) or the per-share price of major publicly held U.S. steel producers underscore. But the sheer complexity and ever-changing intermix of macroeconomic, geopolitical, monetary and demographic factors that Japanese mills face at home and abroad are daunting, so much so that they have forced Japan’s major mills—Nippon Steel & Sumitomo Metal Corp. (NSSMC), JFE Steel Corp., Kobe Steel Ltd. and Nisshin Steel Co. Ltd.—to rethink their approach to growth and refocus their energies, assets and capital to capture the opportunities promised by the fast-emerging Association of Southeast Asian Nations (Asean) region.

That change of focus and wholesale turn to the East promises to have significant ramifications in the United States, particularly on the trade front, major Japanese mills say.

Tangible proof of just how steep the competitive challenges confronting Japan’s steel sector are came last October with the official birth of NSSMC through the merger of Nippon Steel Corp. (Japan’s biggest steel producer) and Sumitomo Metal Corp. (the country’s third-largest producer) to create the world’s second-largest steelmaker. The marriage, which marked a turning point for the Japanese industry, was widely seen—and acknowledged by NSSMC—as a move to improve Japan’s odds of winning the war for Southeast Asia’s steel market.

"Basically, a mutual understanding over the difficult state of the market was the trigger point (of the merger)," Shinya Higuchi, representative director, executive vice president and member of the board of directors, told AMM in an interview late last year from NSSMC’s headquarters in Tokyo (amm.com, Feb. 25). "To overcome that, the two companies had to join."

Just over three months later, NSSMC released its midterm management plan, which sets forth the newly merged group’s management policy from fiscal year 2013 for a period of about three years. Besides identifying many of the individual steps and overarching strategy NSSMC will employ to "win the intensifying competition and achieve sustained growth in profits," the plan serves as a collective summary of the competitive headwinds and rocky landscape facing Japan’s steelmakers as they seek growth in Southeast Asia’s emerging markets.

"Competition in the East Asia market, where NSSMC mainly operates, is expected to intensify," the steelmaker said. "While global steel demand is forecast to grow at a modest rate, newly constructed steel works are scheduled to begin operation in south China and the Asean region in the first half of 2015, and Japan’s steel demand is likely to stay around 60 million tonnes per year."

In a 32-frame Power Point presentation detailing its midterm plan, NSSMC identified seven steel-producing facilities—ranging from new and/or expanded blast furnaces to complete greenfield plants—slated to begin operation in East Asia over the next three years. One of the most ambitious is a 3-million-ton-per-year molten iron integrated steel mill slated for completion this year in Cilegon, Indonesia. The joint-venture project is owned 70-percent by Posco and 30-percent by Indonesian state-run steelmaker PT Krakatau Steel Tbk. Plans for a second-phase expansion would lift molten iron production at Cilegon to 6 million tons annually.

These projects and more—NSSMC and PT Krakatau Steel announced late last year that they had agreed to conduct a detailed study to jointly launch a business for the manufacture and sale of automotive flat steel products in Indonesia—signal in no uncertain terms that the battle is on to capture growth in steel demand on tap for the Asean region. And although U.S. mills will sit this one out, the pivot to the East on the part of Japan’s major mills promises to reverberate in the United States, particularly in the international trade and high-value, niche-product arena.

None of this comes as news to the Japan Iron and Steel Federation (JISF), which authored a 25-page report identifying the factors driving the change in market focus and competitive strategies by its member companies. The take-away message for American mills—that Japanese mills have refocused the mix of products exported to the United States and are leveraging research and development resources to push into higher, value-added, specialized products—isn’t a new one, but it has taken on a new resonance, given the rise of the East and mounting investments by Japanese auto and steel producers to capture Asian growth.

JISF’s report, "The Japanese Steel Industry in the Global Steel Market," shares some simple but compelling arithmetic to explain the rationale behind Japan’s reset, beginning with the about-face in annual gross domestic product (GDP) growth in the United States vs. Asian countries. Annual U.S. GDP growth averaged 2.3 percent from 2000 to 2010 vs. 10.3 percent in China, 5.2 percent in Indonesia, 5 percent in Malaysia, 4.4 percent in Thailand and 4.5 percent in South Korea.

Steel consumption figures tell a similar story. North America accounted for 9.3 percent of global finished steel consumption in 2010, down from 22.3 percent in 1998, while Asian consumption jumped to a 63.2-percent share from 39.1 percent in the same comparison, the JISF report said.

Japan’s iron and steel exports reflect that tilt in geographic consumption trends. Japanese exports of iron and steel totaled 42.5 million tonnes last year, with China taking 6.1 million tonnes (about 14 percent). Excluding China, Southeast Asia accounted for 27.4 million tonnes (just shy of 65 percent), with the top destinations including South Korea (8.2 million tonnes), Thailand (5.4 million tonnes), Taiwan (3.5 million tonnes), Vietnam (2.3 million tonnes), Indonesia (2.2 million tonnes) and Malaysia (1.4 million tonnes).

Japanese iron and steel exports to the United States last year totaled 2.5 million tonnes, with high-value products representing an increasing portion of the overall mix. The JISF estimated that the proportion of high-value products—high-tensile strength steels, interstitial-free steels and alloy tool steels—exported for the automotive industry worldwide increased to 83 percent in 2011 from 76 percent in 2005, led by the expansion of Japanese automakers in emerging economies, mainly Asia.

"In these emerging economies, high-value-added steel products from Japan are required because the local steelmakers cannot produce high-quality steel products that the Japanese automakers require," the JISF said.

A key component of Japanese steel’s battle plan to win the Southeast Asia market, and an ongoing reminder that Japan Inc. is alive and well, Japanese automakers have assumed the role of an advance guard, setting up shop and a beachhead in new markets and laying the foundation for the formation of joint ventures teaming Japanese mills with a local producer.

"These joint ventures capitalize on two key facts: rapidly increasing consumption of steel products and lack of a local producer or insufficient capacity to meet demand," the JISF report said. "Most joint ventures require sourcing of substrate from Japanese mills."

The approach, with a twist here and there, works equally well in developed economies. Only weeks ago, Nissan Motor Co. Ltd., Japan’s second-largest automotive company, announced plans to expand the use of advanced high-strength steels (AHSS) in up to 25 percent of the vehicle parts (measured by weight) installed in new production models (amm.com, March 20). The 1.2-gigapascal ultra-high-tensile strength steel with high formability, jointly developed by Nissan, NSSMC and Kobe Steel Ltd., has been employed in the new Infiniti Q50, which goes on sale in North America this year. Nissan said it will make use of the AHSS starting in 2017 as one of its initiatives to help reduce vehicle weight.

Meanwhile, Japanese mills are counting on a commitment to technical excellence—and more than 3,200 steel patents granted since 2000 to prove it—to squeeze growth out of mature markets, such as the United States, which they serve with a range of specialty products. Key examples include NSSMC’s HE rail, Zinkote electrogalvanized steel sheet and high-strength, Super 17 Cr oil country tubular goods (OCTG); JFE Steel’s wear-resistant premium rail; Kobe Steel’s automotive wire rod and bar; and Nisshin Steel’s family of advanced stainless grades.

Although conventional wisdom suggests that Japan’s collective move upstream into high-value, highly specialized products would shield the industry from trade actions that proliferated in commodity-grade carbon products during the height of the Asian financial crisis in 1998 and 1999, a filing only weeks ago by Thomas Steel Strip Corp. has questioned that theory. Thomas, a division of India’s Tata Steel Ltd., filed an anti-dumping petition March 27 with the Commerce Department and the U.S. International Trade Commission alleging that nickel-plated steel from Japan is injuring the U.S. industry (amm.com, March 29). Warren, Ohio-based Thomas argued in the filing that diffusion-annealed nickel-plated flat-rolled steel products imported from NSSMC, Katayama Special Industries Ltd. and Toyo Kohan Co. Ltd. have depressed U.S. prices, squeezing the company’s profits and causing it to lose market share.

Meanwhile, closer to home and against a background marked by the steady devaluation of the yen, Japan’s mills are in line to benefit from the weakening of the currency in the form of reduced imports, although at the same time they must pay more for imported raw materials and energy.

Thanks in no small part to the earlier persistent strength of the yen, total iron and steel imports into Japan soared 79 percent over the past four years, climbing to 4.46 million tonnes in 2012 from 2.5 million tonnes in 2009. The majority of the shipments, or just under 4.42 million tonnes, originated in Southeast Asia, with South Korea accounting for the lion’s share at 3.09 million tonnes (70 percent of the total) followed by Taiwan (846,075 tonnes) and China (458,735 tonnes).

Although Japan has been the target of recent anti-dumping actions by Indonesia and Australia, it has consistently avoided taking similar steps in the steel trade arena. "It is not our way," Higuchi said. "The basic philosophy or idea of the Japanese steel industry is to keep free trade. That’s it."

The Indonesian government decided in mid-March to implement anti-dumping measures for three years on cold-rolled coil and sheet imported from Japan, China, South Korea, Taiwan and Vietnam.

"The Japanese steel industry will request the Indonesian government to reconsider the determination and will carefully examine the decision, including analysis in the light of WTO (World Trade Organization) consistency," Hiroshi Tomono, chairman of JISF and president and chief operating officer of NSSMC, said in a statement recently. "After holding discussions with Japanese trade officials, we will determine the proper course of action."

The most recent action on the Japan/U.S. trade front took place in mid-January, when the ITC voted to continue existing anti-dumping duties on clad steel plate following a third sunset review. The ITC earlier revoked anti-dumping measures on cut-to-length carbon-quality steel plate imported from Japan as a result of a second sunset review, and in spring 2011 voted to revoke duties on hot-rolled steel from Japan and Brazil, also following a second sunset review.

While Japanese mills have yet to file trade action, the industry has engaged in no fewer than six "steel dialogues" since June 2011, conducting discussions with Europe, Taiwan, Indonesia, Thailand, South Korea and China. Over the years, it also has conducted negotiations on economic partnership agreements with Mexico, Malaysia, Thailand, Indonesia, the Philippines, Vietnam and India.

That doesn’t necessarily indicate that Japan’s steel sector isn’t being impacted by underpriced imports, however.

"We are carefully watching whether the Chinese, Taiwanese and Koreans are selling their products lower than the domestic price. ... We are checking to determine if the product is good enough, if they are selling at a profit. If they say the price is higher or equal to their domestic price, you cannot say anything" Higuchi told AMM.

"The fact that we are not happy with a situation does not mean it is against the WTO," he added. "We respect the WTO. We respect free trade. ... For Japan as a nation, as a country, free trade is the key to success. And a lifeline."


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