One year after a Japanese-style megamerger created the worlds second-largest steelmaker, Nippon Steel & Sumitomo Metal Corp. (NSSMC) is on track to squeeze every ounce of competitive advantage out of the efficiencies that come with supersizing.
A heavyweight by world standards, NSSMC knows exactly where it wants to go (a minimum targeted return on sales of about 5 percent with an eye on eventually achieving 10 percent), how its going to get there (by banking on technological superiority to build an organization with world-leading competitive strengths) and when it will arrive (2015 at the latest).
A year into that trek, all systems are go. In early May, Katsuhiko Ota, representative director and executive vice president, told investors that by the end of its fiscal year ended March 31 the newly merged company had overachieved its cost-reduction target by threefold, reeling in savings of 32 billion yen ($331.4 million). The company also had drafted and put into motion a carefully calculated action plan--one that identifies which production facilities across Japan will stay and which will go.
NSSMC is chasing an ambitious goal on the cost-reduction front, targeting synergies of 200 billion yen ($2.07 billion) or more annually in about three years. Some 120 billion yen will come through consolidating technology (using low-grade raw materials, increasing labor productivity and promoting high efficiency in processes, for starters) and establishing an optimal production network by fielding an all-star lineup of equipment, base loading and coordinating top-performing units across NSSMCs expanded family of facilities, as well as select shutdowns and avoiding redundant investments.
Japans largest steelmaker said it expects to make strategic investments for growth of about 100 billion yen ($1.04 billion) annually and divest assets amounting to about 300 billion yen ($3.11 billion) by the second half of fiscal 2015.
In the meantime, NSSMC is slicing and dicing operations in step with a belt-tightening schedule that began in the first quarter of fiscal 2013 and stretches through the first quarter of fiscal 2016. Undertaken to optimize fixed costs and realize high productivity/low-cost operations, the rationalization drive calls for the shutdown of the No. 3 blast furnace at Kimitsu, Japan, at the end of fiscal 2015, as well as discontinuing a continuous caster and basic oxygen furnace there. As a result, Kimitsu will shift to a two-blast-furnace operation, as will Wakayama, where blow-in of the new No. 2 blast furnace is being postponed.
Downstream, post-merger plans call for NSSMC to reduce the number of cold strip mills it operates to 15 from 17 prior to the merger, cut its corps of continuous galvanizing lines to 13 from 18 and slice the number of electrogalvanizing lines to four from seven by the first quarter of 2015. NSSMC also plans to shutter a butt-welded pipe line at Kimitsu by the fourth quarter of fiscal 2013.
Although the success NSSMC has notched to date is self-made, there is little question the newly merged steelmaking giant--and the domestic markets its serves--have been energized by Abenomics, the aggressive, pro-growth policies introduced by Japanese Prime Minister Shinzo Abe. In January, three months after Japans first- and third-largest steel producers (Nippon Steel Corp. and Sumitomo Metal Industries Ltd., respectively) merged to form NSSMC, the Japanese government unveiled a $104-billion economic stimulus package, with much of the planned outlay targeted at infrastructure projects.
While Japans mills welcomed the move, they cautioned that it would take time before the countrys steel sector would benefit in real terms from the measure. In retrospect, they might have been overly cautious.
The latest quarterly Tankan report, a survey of Japanese business sentiment by the Bank of Japan (BoJ) suggests that Abenomics is sparking the Japanese economy. The index for large manufacturers climbed to 12 in September from a reading of 4 in June. A reading above zero indicates positive sentiment.
With regard to the outlook, Japans economy is expected to continue a moderate recovery, the BoJ said in its Monthly Report of Recent Economic and Financial Developments issued Oct. 7. The Bank pointed out that exports and business fixed investment have been picking up, corporate profits have improved, public investment has continued to climb and private consumption has remained resilient. Reflecting these developments in demand both at home and abroad, industrial production is increasing moderately, the Bank said. Business sentiment has continued to improve.
In another measure of the rub-off effect of the currency depreciation component of Abes resuscitation plan, Peter Marcus, managing partner of Englewood Cliffs, N.J.-based World Steel Dynamics Inc. (WSD), said in a presentation at the Steel Success Strategies XXVIII conference in June that a softer yen would help enhance the Japanese steel industrys position on WSDs cost curve for steel sheet producers.
In contrast to mills in Brazil, India and Russia, the Japanese mills are in the midst of a significant improvement in cost position, given lower raw material prices and a weaker Japanese yen, Marcus said. If steelmakers raw material prices fall to the levels WSD forecasts, the Japanese mills will be competitive with the Russians in many markets because their plants are located on deepwater ports.
Based on a WSD assessment, NSSMC has a lot going for it with or without a pending dip in iron ore and metallurgical coal costs. The latest iteration of the consultancys steelmaker rankings, issued in June, lists 34 companies that it considers positioned to be winning performers in the years ahead.
NSSMC ranks No. 7, pulling in a weighted average score of 7.15, trailing South Koreas Posco Ltd. (7.73), Russias OAO Severstal (7.46), Charlotte, N.C.-based Nucor Corp. (7.28), Russias Novolipetsk Steel (7.21), Japans JSW Steel Ltd. (7.2) and Brazils Gerdau SA (7.16).
The purpose of the steelmaker rankings is to better understand the companies attributes rather than to imply that one company is better or more worthy than another, WSD said in one of several footnotes accompanying the list, which is compiled on an as-needed basis. The rankings reward pro-active management, size and integration from raw materials to downstream businesses, noting that the system is subjective and duplicative.
NSSMC and fellow Japanese steelmaker JFE Steel Corp. both scored a perfect 10 in six different categories: location close to customers; value-added product mix; conversion costs/yields; skilled and productive workers; downstream businesses; and country risk factor.
Theres little question that NSSMC is banking on these attributes in combination with an over-arching commitment to pushing the productivity envelope through innovative production processes and developing high-performing, differentiated products in key growth areas to propel and keep it ahead of the global steelmaking pack. Target markets include automotive, resource and energy, and overseas infrastructure-related markets (rail transportation).
To translate that formula into fact, NSSMC will call on the talents of what it describes as the worlds largest team of 800 skilled researchers, the synergies that come with a megamerger, and the collective dedication and pride of a work force seasoned by two decades of lean economic times at home and intense competitive pressures from mills in neighboring South Korea and China.
People on the shop floor are highly motivated, Shinnosuke Arita, senior manager of personnel at NSSMCs Yawata Works, told AMM during a recent plant visit. Whats behind that motivation is difficult to explain. One factor is a strong tradition. We started producing steel at Yawata 112 years ago. ... Everybody takes huge pride in being part of the production. The pride is passed down.
Yawata, one of 16 individual plants NSSMC counts across Japan, specializes in producing a variety of high-performance, high-value-added products--from bar steel and steel pipe and tube to thin sheet--in small lots. The plant has been taking on an increasingly important role as a base for supplying medium-high-grade steel to automobile factories in Japans Kyushu district and as a center for exporting steel to the Asian market.
Each steel works has a role to play, Arita said. At Yawata, that role is to supply a range of products in small lots. The Oita Works, which--like Yawata--is located on Kyushu Island, plays a different role. It produces large quantities of hot-rolled sheet and heavy plate for a wide range of applications from automotive to shipbuilding, construction and industrial equipment.
Regardless of the distinct role of each NSSMC steel works, the collective agenda is set and has been embraced by employees throughout the newly merged company, from its Tokyo headquarters to the mill floor.
There are two challenges. The first is to improve our competitiveness in terms of cost. There are emerging competitors in China, South Korea and India. To beat them, we must be best in cost competitiveness, Arita said. Of course, the Japanese domestic market is important. But we have to look at major markets overseas and we have to win at cost competitiveness in those overseas markets.
The second challenge, Arita said, is to excel at developing new products. When we can develop a new product faster and earlier than our competitors--a product that our customers want--that also improves our competitiveness, he said.
Posco has very good competitiveness in terms of cost and production efficiency, Arita acknowledged. They are now able to produce higher-quality product as well. So I look at Posco as the toughest competitor.
Which of the two companies is the more competitive? Measuring is difficult, Arita said. I think our customers decide. Customers evaluate. For example, do customers trust us and keep buying our product or not? And who does a customer go to first for a consultation when they need a new product to be developed? In the end, the customers decide.