Japanese Steelmakers' Merger A Taste of More to Come

How should we view the merger of Nippon Steel, Japan’s largest steel producer, and No. 3 player Sumitomo Metal Industries? The two steel companies ranked 6th and 23rd respectively, according to an Asahi.com article, and would become Japan’s largest when merged and the world’s number second largest behind ArcelorMittal, but would still only produce half AM’s 100 million-ton capacity, according to an article in The Australian. Nevertheless, one of the aims expressed to the media is a consolidated entity would be able to better compete for and negotiate with raw material suppliers such as iron ore producers BHP, Rio and Vale. One has to question just how realistic that is given their high level of reliance on such suppliers and the failure of ArcelorMittal to fare any better even with twice the size. Indeed, Nippon Steel and Sumitomo Metal have been collaborating closely for much of the last decade, if they hadn’t found a way to pool their purchasing and have an impact on their biggest input cost by now then a merger won’t make any difference.

No, this probably has more to do with competing in sales markets. Japanese transplants in Asia and elsewhere traditionally bought Japanese steel to make automobiles, consumer goods and for major projects such as oil refineries. But in recent years companies like Nissan Motor Co., which shifted manufacturing of its mainstay small car March to Thailand last summer, has been looking to South Korean and Indian makers of sheet steel, according to Asahi. Toyota Motor Corp. uses steel produced by domestic producer Tata Steel Ltd. for its cars made in India. “Steel produced by Chinese, South Korean and Indian makers is by far cheaper. We don’t need to rely on Japanese steel,” a senior official at a major Japanese carmaker is quoted as saying. To compete with that, Nippon and Sumitomo need to invest in production facilities in those countries, and size may help spread those costs over a greater sales volume and avoid duplication of investments as may occur between competing firms.

Japan’s Fair Trade Commission (FTC) must bestow approval, which could take some four months. Nippon Steel’s move to increase its stake in Nisshin Steel Co. about a year ago was squashed by the FTC, which warned the company that the move could interfere with domestic competition because the two companies’ combined stainless steel share in the Japanese market would rise. Neither Nippon Steel nor Sumitomo Metal ranks higher than 10th in terms of global stainless steel production, suggesting that the merger will have little impact internationally. However within their areas of expertise, at least domestically, each firm does have a significant market share. Nippon Steel is strong in producing high tensile steel for autos and electromagnetic steel plates used in household appliances. Sumitomo is known for its steel pipes, particularly those used in oil wells. So far though, other Japanese steel producers have raised no objections; indeed some consumers such as Mazda have welcomed the proposal, saying it would improve the merged firms’ ability to supply to them in overseas markets.

The level of mergers in Japanese industrials has declined steadily over the last decade as this graph from the FT shows:

Source: The Financial Times

As with the wider Japanese industrial landscape, so too it is true for the steel makers, resulting in a growing loss of competitiveness and some would argue marginalization of Japanese producers compared to South Korean, Chinese and Indian competitors.

The steps being taken by Japanese steel producers are behind the curve compared to many. Significant consolidation occurred in the USA and Europe during the 90s and early part of the last decade. Both Japan and China are arguably ripe for consolidation in this decade. We have little to fear and something to gain from a stronger Japanese steel industry; a merged and more cohesive Chinese steel industry may be a different story all together.

–Stuart Burns

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