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Tokyo Steel returns to the sword and slashes deep


TOKYO The announcement by Japan's largest electric furnace operator, Tokyo Steel Manufacturing Co. Ltd., that it would slash its prices by up to 38 percent sent shockwaves through the Japanese steel industry, with other steelmakers, trading houses and customers all struggling to work out the long-term implications of the move.

The company said that effective with November shipments it would reduce rebar by 38 percent to 57,000 yen ($578) per tonne; H-beams by 30 percent to 83,000 yen ($842) per tonne; and hot-rolled sheet by 26 percent to 72,000 yen ($731) per tonne.

Tokyo Steel, which implemented its first across-the-board price reduction in more than three years for September contracts after scrap prices began to decline in August, said that its latest move was justified by the collapse of ferrous scrap raw material prices to as low as 18,000 yen ($183) per tonne from close to 70,000 yen ($711) per tonne in mid-July.

It added that it would be more effective to try to establish a bottom to the market by cutting prices in one aggressive move rather than slowly reducing them over a period of months.

Tokyo Steel's major rivals, such as Nippon Steel Corp. and JFE Steel Corp., played down the significance of the move, insisting that demand for many of their products remained strong.

"We had been expecting Tokyo Steel to cut prices, but to be honest they were larger than we expected. However, it's all about supply and demand for individual products and we are actually looking to increase prices of many of our products, not cut them," an executive at one major blast furnace operator said.

Nevertheless, Tokyo Steel has a clear advantage in production costs over its blast furnace rivals, which earlier this year were forced to pay record prices for coal and iron ore, making it much easier for it to cut prices.

"Blast furnace operators are handicapped because their raw material costs are settled in annual contracts. Tokyo Steel, on the other hand, has much greater price-adjustment power because its raw material costs are largely based on current market prices. While this can be a disadvantage when scrap prices are high, it's a massive advantage when prices fall," a Tokyo-based steel industry analyst said.

He added that Tokyo Steel is likely to continue to benefit from low scrap prices. "I cannot see scrap prices recovering anytime soon, especially with EFs in South Korea and Taiwan—who are major purchasers of Japanese scrap—cutting back on production levels."

In the first eight months of this year, Japanese scrap exports posted a year-on-year decline every month bar one, with August exports falling to their lowest level in more than two years, according to data from the Japan Ferrous Raw Materials Association. Indeed, a recent export auction by scrap dealers in the Tokyo area was cancelled for the first time in years due to a complete lack of bids from overseas buyers.

Tokyo Steel has always been considered something of a maverick by Japan's steel industry. While the general consensus among Japanese steelmakers is that the best way to adjust to demand has been to control production, Tokyo Steel often has used pricing as its main tool.

Indeed, the company rose to prominence in the late 1980s when it waged a bitter "H-beam war" against industry leader Nippon Steel. The feud turned so acrimonious that Tokyo Steel left the Japan Iron and Steel Federation. But it also propelled the company from a mid-sized regional player into Japan's largest supplier of H-beams.

Nevertheless, with increasing signs that the financial crisis could grow into a wider global growth recession affecting Japan no less than other countries, Tokyo Steel may well find that reducing prices alone will be insufficient, and that it also will have to reduce output.

"Tokyo Steel's big handicap is that it is strongest in the areas that are showing the weakest demand. This is particularly true of the construction sector, which continues to be in the doldrums ever since the government implemented tighter building standards last summer," the Tokyo analyst said. "Indeed, the outlook for the sector is going from bad to worse."

The steelmaker has been trying to expand its product line-up to reduce its dependence on the construction sector and is currently building what will be the world's largest electric furnace, which will be almost entirely dedicated to producing automotive sheet. However, the 2.5-million-tonne-per-year plant—which will boost Tokyo Steel's total capacity to 6 million tonnes per year, making it Japan's fifth-largest steelmaker ahead of Nisshin Steel Co. Ltd.—is not slated to come online until late next year.

"Until then, Tokyo Steel will struggle, although its cash-rich position combined with the continued weakness in ferrous scrap prices will provide the company a cushion of sorts and allow it to reduce output and cut prices further if need be without totally devastating it. Clearly, this will give it an advantage over blast furnace steelmakers who are saddled with fixed costs," the analyst said.

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