Citigroup Inc, upgrading the stock to a Buy, said that Kobe Steel Limited is likely to be at the center of moves by the nation’s producers to combine.

Mr Toshiyuki Johno, a Tokyo based analyst, said in a note to investors that a merger between Nippon Steel Corporation and Sumitomo Metal Industries Limited should help Japan's steelmakers claw back profits eroded since 2003 and make further tie ups in the industry inevitable.

He added that "The merger is a potential game changer for the Japanese steel industry and may trigger another round of consolidation both in Japan and elsewhere. Kobe may ally with a peer to ensure a recovery of value added in the industry."

According to Citigroup, Japanese steelmakers need to regain pricing power in talks with raw material producers to return to profit after three of the top five posted losses in the last financial year. The steel companies have struggled with a shrinking domestic economy, deflation, a shift of domestic manufacturing orders overseas, as well as a few coking coal and iron ore miners controlling 70% of supply.

Citigroup's Mr Johno raised Kobe from a Hold and set a 12 month target price of JPY 280. Kobe steel closed at JPY 229 on the Tokyo Stock Exchange the day before the note was published. It's up 16% in 2011.

Citigroup forecasts Kobe Steel profits to rise to JPY 55 billion in the financial year ending March 31st 2013 from JPY 6.3 billion in 2010, driven by growth in the company’s steel, resources, engineering and machinery businesses.

(Sourced from www.bloomberg.net)