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Nippon Steel and Sumitomo to push cost savings amid competition
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Tuesday, 02 Oct 2012

Bloomberg reported that Nippon Steel Corporation, which formally combines with Sumitomo Metal Industries Limited, will push to accelerate cost cuts in a bid to become more competitive with steelmakers in China and South Korea.

Mr Shoji Muneoka, who was appointed CEO of the news company said that Nippon Steel & Sumitomo Metal Corporation, as the new company is known, will streamline production lines at domestic steelworks, moving forward a plan to save JPY 150 billion annually three years after integration. Closing blast furnaces will also be considered in the longer term.

Mr Muneoka, president of Nippon Steel before the merger, said on September 26th 2012 in an interview with a group of reporters, that "We will try to bring our cost levels lower to enable us to compete with emerging steel mills. Our cost competitiveness is relatively weak."

The combination of Japan's biggest and third biggest steelmakers, announced in February 2011, was designed as a way to gain leverage over raw material suppliers while trying to fend off competition from South Korea's POSCO and Shanghai based Baoshan Iron & Steel Co.

Mr Yuuki Sakurai, president of Fukoku Capital Management Inc, which manages JPY 1.5 trillion of assets, said that "Unless the new company cuts costs, they won't be able to survive the competition. Asian steelmakers will be locked in a fierce battle if the global economy slumps in the next year or two."

The two companies, battered by the yen's appreciation and falling steel prices, on August 30th 2012 forecast losses in the six months ended September 30th 2012 on a combined JPY 240 billion impairment charge at three unprofitable steelworks. The Japanese currency has gained about 8% against the US dollar in the past two years, the second biggest gain among the Group of 10 currencies tracked by Bloomberg.

Mr Muneoka said that Nippon Steel & Sumitomo Metal inherited 16 steelworks in Japan with 14 blast furnaces, which use iron ore and coal as raw materials to produce the alloy. The company will secure employment by moving extra jobs to overseas facilities and affiliates.

Nippon Steel was formed in 1970 through the merger of Yahata Iron & Steel Co. and Fuji Iron & Steel Co. It reigned as one of the world’s top three steel companies from 1970 to 2008 before Chinese mills and POSCO overtook the Japanese steelmaker in 2009, pushing it to sixth place globally.

Mr Jiro Iokibe, an analyst at Daiwa Securities Co, said that Nippon Steel & Sumitomo Metal should secure contracts from local steel users in the targeted markets to broaden customers as Asian rivals step up efforts to expand in growing economies. He added that "The new company should have a marketing strategy that doesn't stick too closely to historic ties with its domestic customers."

Mr Muneoka said that Nippon Steel & Sumitomo Metal will allocate 800 workers and about JPY 70 billion a year on research and development, more than any of its competitors. He added that "For a manufacturer, the basis is to hold the top level of technologies related to steel in all fields, including production, product development, R&D, energy conservation and environment."

According to data compiled by the World Steel Association, Nippon Steel and Sumitomo Metal together produced 46.1 million tonnes of crude steel in 2011. The two companies held a 43% market share in Japan and 3% worldwide, lagging behind only Luxembourg based ArcelorMittal in global terms.

Source - Bloomberg


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