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A global race to reap growth and the promise of mega-scale

Keywords: Tags  Shoji Muneoka, NSSMC, japan, steel, Jo Isenberg-O'loughlin




There was no escaping the urgency in Shoji Muneoka’s words as he delivered a New Year’s message to some 30,000 employees of the newly merged Nippon Steel & Sumitomo Metal Corp. (NSSMC).

Muneoka, chairman and chief executive officer of what is now the world’s second largest steelmaker urged 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 Japan’s largest and third-largest steelmakers--and to do it quickly.

“The situation is dire,” he said, citing the body blows that had been delivered by “the so-called sextuple whammy” on Japan’s economy in general and the country’s steel sector in particular. On a macro scale, the island nation was and, in select cases, still is wrestling with challenges ranging from an electric power supply problem and the appreciation of the yen to a trade balance that was “expected to become vulnerable to repeated deficits soon.”

At the same time, Japanese steelmakers, which together produced 107.2 million tonnes of raw steel in 2012, up from 106.46 million tonnes in 2011 and 73.2 million tonnes through the first eight months of this year faced unsettling changes in market structures at home and offshore.

Besides a drop in demand for construction, Japan’s manufacturing base is accelerating a shift to overseas production and local procurement from overseas suppliers, Muneoka said. “As a result, it will be difficult for Japan’s domestic steel demand to recover from around 60 million tonnes per year to previous levels of 80 million tons.”

Meanwhile, Japan’s 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 Japan’s 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 NSSMC’s headquarters in Tokyo. “To overcome that, the two companies had to join.”

Twelve months after the official completion of that merger, NSSMC is still racing to fully capture and further identify 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 Year’s 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, 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 deliver results.

Interestingly, integration NSSMC-style doesn’t 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 don’t 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 company’s 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 Steel’s former plant,” Higuchi said. “Those things are under way and will proceed until the end of March,” he said late last year. “It will take five or six months, and after that we will make the streamlined plants of the new company and adopt a new structure.”

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 competition--Korea’s 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 Posco’s 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 aren’t 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 Galaxy tablet.”



Competitors in one arena but collaborators in another, NSSMC and Posco’s 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 Asia’s largest cold-rolling mill, with Posco owning 85 percent of the operation and NSSMC the other 15 percent.

“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 Steel’s trade secrets.

With growth in domestic steel demand stymied, NSSMC is counting on three end markets--automotive, energy and construction--and 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 Japan’s auto and steel industries is nothing new. And while that bond almost certainly accounts for the earlier 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 AG’s ill-fated Steel Americas unit, the future belongs to Asia, where China, Japan and Korea are duking it out for market share.

Late last year, NSSMC and Indonesia’s 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, would 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 & Sumkin Galvanizing (Thailand) Co. Ltd. (NSGT), a 360,000-tonne-per-year continuous galvanizing line which began commercial operation in early October. NSGT was 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. The $300-million facitlity is 100 percent owned by NSSMC and capable of producing high-grade, high-quality hot-dip galvanized and galvannealed steel sheet, including automotive outer panels and high-strength steels.

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 one--WinSteel, a tinplate joint venture with Wuhan Iron & Steel (Group) Corp. in China--to 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.

Mexico’s prominence in the list is a direct reflection of that country’s 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 Mexico’s automotive market.

The plant near Monterrey, in which NSSMC holds a 49-percent stake, operates under the name Tenigal S. de RL de CV. Annual production capacity of the $300-million continuous hot-dip galvanizing and galvannealing line, which began operations in August, is 400,000 tonnes. Plans call for sourcing cold-rolled sheet from Ternium’s newly invested pickling line and tandem cold mill (PL-TCM), which was scheduled for completion this summer.

Mexico produced some 2.6 million four-wheeled automobiles in 2011, and it’s 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, NSSMC--through 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 began commercial operation in late May on schedule, supplying products to Japanese, North American and European automakers and auto parts manufacturers in Mexico.

Key equipment includes electric-resistance welded pipe/tube manufacturing facilities, cold-drawing units, and cutting and heat-treating hardware. Rated output of the facility, which is located in Silao, Guanajuato state, is 2,000 tonnes per month.

While developing economies account for the bulk of NSSMC’s investment outlays--and are the epicenter of anticipated growth--the 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 doing--and what we will continue to do--is 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 for us.”

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 is very much of the essence these days at NSSMC.

The original version of this story appeared in the Feb. 26, 2013 daily edition of AMM.


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