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For Kobe Steel, the first order of business is back-to-the-black

Keywords: Tags  Kobe Steel, Hiroya Kawasaki, aluminum, copper, titanium, steel, Kawogawa, Jo Isenberg

Japan’s third largest integrated steelmaker has had its resiliency tested tons of times in the 100-plus years since a Japanese trading firm acquired a steel business based in Wakinohama, Kobe, sowing the seeds of what is now the Kobe Steel Group, a steel and diversified metals and manufacturing company with international holdings in aluminum, copper and titanium as well as construction machinery, cranes, and engineering, and welding equipment and supplies.

More than a century of history and evolution has dished up disasters big and small for the Japanese long and flat products steel producer. The company has endured man-made and natural catastrophes ranging from the Allied airstrikes which by the end of WWII left plants and manufacturing sites throughout Japan heavily damaged to 50 years later when the Great Hanshin-Awaji Earthquake struck western Japan in 1995. The quake completely destroyed Kobe Steel’s headquarters building, forced the shutdown of the blast furnace anchoring its Kobe Works, and racked up an estimated 102 billion yen ($1.3 billion) in damage.

Today, after two years of deepening losses, Kobe Steel, which produced 7.01 million metric tons of crude steel in fiscal year 2012 ended March 31, 2013, faces a test as daunting as any measured in megatons or on a Richter scale.

Kobe Steel former president and chief executive officer Hiroshi Sato wasted no time identifying the urgency of the situation and issuing a mandate to Kobe’s some 35,000 employees in a new year’s message delivered the first working day of this year. “Our top priority in fiscal 2013 is to turn a profit on a consolidated ordinary income basis,” Sato said. “The market will not allow us to keep making losses.”

Four months later in an earnings forecast for fiscal 2013 current president and chief executive officer Hiroya Kawasaki, who was appointed on April 1, pledged to turn the all-important corner to profitability. Cautioning that the world economy is “unclear,” and that the “external environment surrounding the Kobe Steel Group is not anticipated to quickly improve despite the lower yen and other signs of progress,” Kawasaki forecast net income at about 35.0 billion yen ($437.5 million), “owing to an improvement in inventory valuation and a change in the method of depreciation.”

To accelerate its’ drive back into the black, Kobe formed a cost-cutting committee last October and in what it called a short-term measure to improve profits, reduced the monthly salaries of its directors, officers and managers. Besides moving to cut operating expenses, the company also took steps to rein-in fixed and procurement costs, reduce inventories, review investment projects and make very careful choices as part of its decision-making dynamics.

Kobe is not alone in its pursuit of profits against a background of a radically reordered and increasingly competitive landscape. Economic, demographic, and political factors have combined to force Japan’s major integrated mills to rethink their strategies for growth amid rising and aggressive competition from their steelmaking counterparts in China and South Korea.

Although being modified to keep pace with intervening market developments, the outlines of the Kobe Steel Group’s medium to long-term business vision took shape three years ago when the KOBELCO VISION “G” plan was formalized. The “G” stands for global, group and growth with the plan serving as a navigational tool or roadmap to steer Kobe successfully through the next five to ten years.

Kobelco’s VISION “G” plan was prefaced on two key assumptions: that steel demand in Japan would decline against a background of falling birth rates and an aging population; and that steel demand would expand overseas, mainly in emerging countries.

To capture that growth, the plan called for Kobe to create high-end “Only One” products--new products that only the Kobe Steel Group could offer--and to strengthen monozukuri-ryoku or the company’s ability to consistently provide reliable technologies, products and services. The plan also called for the Group to accelerate initiatives in growth fields such as energy, resources and the environment both in Japan and abroad.

As is often the case, things have not worked out exactly according to plan with unexpected factors ranging from large-scale natural disasters in Japan to changes in overseas economies and dramatic fluctuations in exchange rates emerging along the way. Rather than carrying on the VISION “G” plan, however, Kobe, after absorbing two straight years of losses in fiscal 2012 (ended March, 2013) and fiscal 2011, implemented Phase 2 in the form of its Fiscal 2013-2015 Medium Term Business Plan.

Released in late May, the Plan covers the entire company but its major thrust targets the company’s upsteam steelmaking operations, where a consolidation drive calls for concentrating all primary operations at the Kakogawa Works while shutting down the blast furnace, basic oxygen furnace, continuous casting equipment and blooming mill at the Kobe Works.

To improve the operating rate and increase production of semi-finished products, the Kakagowa Works will benefit from a capital investment totaling about 50 billion yen ($625 million) to underwrite the addition of a new bloom caster, secondary refining equipment and measures taken to increase the capacity of the Works No. 2 blooming mill as well as enhance the transfer capability for semi-finished products. The larger of the two plants, Kakogawa was completed in March 1970 and specializes in flat products. Annual crude steel capacity is 6.8 million tonnes. The Works is equipped with three blast furnaces, two of which (5,400m3 and 4,500m3 inner volume) are in operation, three basic oxygen furnaces (575,000 tonnes per month combined), three slab casters (490,000 tonnes per month combined), a bloom caster (140,000 tonnes per month), a plate mill (140,000 tonnes per month), a hot strip mill (360,000 tonnes per month), a cold strip mill (160,000 tonnes per month), a continuous anneal line (45,000 tonnes per month), two electrogalvanizing lines (60,000 tonnes per month combined), two-hot dip galvanizing lines (56,000 tonnes per month) and a wire rod mill (115,000 tonnes per month.)

The Kobe Works, which specializes in wire rod and bar, is known for small-lot production of a wide variety of steels. Annual crude steel capacity is 1.4 million tonnes. The Works is equipped with one blast furnace (2,112m3 inner volume), two basic oxygen furnaces (115,000 tonnes per month), two bloom casters (118,000 tonnes per month combined), a wire rod mill (55,000 tonnes per month), and a bar mill (68,000 tonnes per month).

The planned investments at Kawogawa are expected to take several years--”out to around 2017”-- to complete. Once the new equipment is up and running, the blast furnace at Kobe Works will be shut down. Downstream rolling operations will remain the same with Kakogawa supplying billets for use in its sister plant’s bar and wire rod mills.

“The end result is that Kakogawa will continue to make around 7 million tonnes of crude steel, which is sufficient to source both its own requirements and those of the Kobe Works,” a company spokesman said. “Production of steel products will remain the same.”

He noted that in fiscal 2012 and fiscal 2011, Kobe Steel Group produced 7.01 million tonnes and 7.17 million tonnes of crude steel respectively. “The big difference is since excess capacity will be eliminated, production capacity will match actual production levels,” he said.

The Kobe Works shares its location with two power plants sporting a combined capacity of 1.4 million kilowatts of electricity, or equal to approximately 70 percent of the peak power demand used by the city of Kobe. With the startup of the No. 1 power plant at Shinko Kobe Power Station in 2002 and the No. 2 power plant two years later, the Kobe Steel Group became Japan’s largest wholesale supplier of electricity. The company is said to be mulling the possibility of building a power station on land currently occupied by the blast furnace earmarked for shutdown at the Kobe Works.

A more predictable market than steel, the power generation business could play an expanded role in the company’s quest for profitability.

“The Kobe Works produces about 2,000 different types of steel,” Shoji Miyazaki, deputy general manager of the facility, told AMM in a recent plant visit, adding that the Works has 50 percent of the world market for valve spring steel and supplies special steel to a variety of automotive-related markets including bolts, connecting rods, crank shafts, differential gears, and suspension springs.

It’s no secret that the Kobe Steel Group’s fortunes are tied closely--perhaps too closely some say--to the global automotive market, which is a lynchpin of its future growth strategy. Looking ahead, Kobe expects the automotive market in North America to be strong and demand in China to recover in 2013.

The anticipated strength in automotive is projected to offset sluggish demand in the shipbuilding industry. “As a result steel demand is expected to remain steady,” the Kobe Steel Group said in its April 26 forecast for fiscal 2013. “Although the oversupply of steel in the Asia region is not anticipated to be resolved, the export environment is expected to show some improvement due to the weaker yen,” the company added.

Kobelco, the brand of Kobe Steel and name the company is known by, is definitely no stranger to globalization. The company opened its first overseas location--an office in New York City--in 1960 and accelerated its international activities through the 1970s, setting up companies and offices in Southeast Asia, the United States and China.

In step with the KOBELCO VISION “G” medium and long-term business vision, much of the company’s offshore investments are and will be tied to the automotive and other growth markets in emerging--and mature--economies. In March of this year, Kobe Steel Ltd. announced that Kobelco Spring Wire (Foshan) Co., Ltd, (KSW) a joint venture had begun production of steel wire for high-quality springs. The world’s largest auto market, China produced 19 million cars in 2012 with estimates projecting output there could reach 30 million cars in 2020.

The just-commissioned KSW plant marks Kobe’s first overseas company to process wire rod for use in engine valve springs and other high-quality spring products. Kobe Steel already has two companies in Thailand, one in the United States and three in China that process steel wire rod for suspension springs and cold heading quality (CHQ) wire rod for fasteners.

Other recent automotive-related activities include the formation of a technical alliance with voestalpine Krems on roll-forming technology using automotive ultra high-strength steel sheet and the construction of a continuous annealing line at PRO-TEC Coating Co., Leipsic, Ohio, a joint venture formed in 1990 with Pittsburgh, Pa.-based United States Steel Corp.

“PRO-TEC began operating its hot-dipped galvanizing line in May, 1993,” Kawasaki recalled at a ceremony marking the formal commissioning of the new continuous annealing line in late May of this year. “The second line was build in 1998 and annual capacity was increased to 1 million tons, making PRO-TEC the single largest supplier in North America of hot-dipped galvanized sheet for automtoive use,” the Kobe Steel executive said. “Over the past 20 years, PRO-TEC has made more than 18 million tons of coated steel sheet.”

Construction of PRO-TEC’s technologically advanced, 500,000 ton-per-year annealing line was completed earlier this year and “the commissioning went very well,” John Surma, former U.S. Steel chairman and chief executive officer, told analysts in a quarterly earnings conference call April 29. “This state-of-the-art line will process the next generation of advanced high-strength steel with formability attributes that exceed our current range of products and will provide our automotive customers with a cost-effective and environmentally sound alternative to other competing materials,” Surma said.

In another key automotive-related development, Nissan Motor Co., Japan’s second-largest automotive company, announced in March that it planned to expand its use of advanced high tensile strength steel (AHSS) in up to 25 percent of vehicle parts (measured by weight) in new production models beginning in 2017. Jointly developed by Nissan Motor Co., Nippon Steel & Sumitomo Metal Corp. and Kobe Steel Ltd., the 1.2 gigapascal (GPa) ultra-high tensile strength steel with high formability can be used for parts with complex shapes, which had been difficult to manufacture using established high-tensile steels as well as the production of lighter weight sheets.

The announcement comes against a background of increasing concern among Japanese steelmakers that South Korean (Posco) and Chinese mills are rapidly closing the quality gap and disrupting traditionally close relationships between them and their domestic customers, particularly automakers. A senior official at Japan’s Ministry of Economy, Trade and Industry recently estimated the share of Japanese auto steel held by the Koreans at 11 percent with a “high possibility” that number “would increase to maybe 20 percent or more in the coming years.”

Supplying the global and growing automotive marketplace plays a pivotal role in not just Kobe’s but the entire Japanese steel industry’s growth strategies. Establishment of auto production sites in emerging economies in Southeast Asia by Toyota, Nissan et al provide a need and entry point for steel and/or technological expertise, and investment from Japan.

“The domestic market will be gradually shrinking in the future,” Miyazaki said, sharing what he was careful to point out was his personal opinion. “If we don’t look overseas, we will have to face some shrinkage of the market.

“We cannot really lament the current situation without doing something,” he insisted. “For us to grow, we have to look at the emerging countries. We have to capture this as an opportunity and create a business model to do that.”

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