Japan steel mills look abroad as Asia map changes

Japan steel mills look abroad as Asia map changes.

Japan's steelmakers, squeezed by a shrinking domestic market and a strong yen, will probably step up plans to relocate to low-cost countries as they try to stay ahead of rapidly-expanding competitors.
But even this may not be enough to restore sagging margins. Asian rivals POSCO and Baosteel are not only bulking up volumes but also moving up the value chain into steel products normally dominated by the Japanese. A Japanese response to build production facilities in emerging markets could cause a supply glut and a decline in prices.

A flurry of cheap steel imports from China and Korea has hurt export margins at Japan's steelmakers, already reeling from the bruising impact of a yen that has risen 20 percent against the dollar and 40 percent versus the Korean won in the past two years.

"We are in the mighty swell of changing times," Shinichi Taniguchi, senior vice president at Nippon Steel, the world's No.4 steelmaker, told Reuters.

"We need to get out of Japan to tap demand, and will go ahead with a project to build an integrated steel plant in growing markets if conditions fit, but at the same time we need to be cautious not to disturb the market," Taniguchi said.

Steel exports from South Korea, where POSCO and Hyundai Steel are adding capacity, grew 18.7 percent in the first nine months of this year, according to the Japan and Iron and Steel Federation, exerting downward pressure on prices.

That forced Japanese steelmakers to cut export prices of hot coils by more than 10 percent in October-December from three months ago, industry sources said.

South Korea has added 9.5 million tonnes of crude steel production capacity this year, following an expansion of 2.5 million tonnes in 2009.

Japan's steel imports, mostly from South Korea and China, swelled 62 percent in April-September, to 1.9 million tonnes, while exports recorded a first year-on-year fall in 15 months in October to 3.4 million tonnes as shipments to South Korea dived 18 percent.

In terms of technology, Japanese steelmakers -- strong in high-end sheet steel used in cars and electronics and in thick plates keep an edge, at least for now.

Nissan Motor Co this year started selling in Japan cheap March/Micra subcompacts produced at its Thai plant using parts and sheet steel acquired locally, though about 90 percent of the supply contracts went to Japanese firms such as JFE, with 5 percent going to POSCO, industry sources said.

Nippon Steel and the world's No.5, JFE Holdings Inc, maintain high run rates of 90 percent, compared with 70 percent for US steelmakers, though their profits remain at around 40 percent of peak levels seen in the middle of the decade.

"Japanese steelmakers will keep an edge," said Akira Kishimoto, an analyst at JP Morgan. "But their profitability will suffer as they will be forced to sacrifice prices to pursue shipment volumes."

Overseas Escape.

As competition intensifies, Japan's top four steelmakers are all expanding overseas, looking to build steel plants through partnerships with local players in emerging markets.

Japan's domestic demand could further shrink as a high yen will prompt more steel-using companies to shift production to Thailand, China and other low-cost countries.

The Thai-made Micra, with a price tag of 1 million yen ($12,000), has been the best-selling imported car model in Japan since its July launch.

Kishimoto of JP Morgan said Japan's domestic car output could fall as much as 10 percent over the next two to three years from an estimated 9 million units in 2010 if the yen stays at its current level. The World Steel Association expects only Japan will see a contraction in domestic steel demand in 2011, citing a tight fiscal policy, a strong yen and a weakening of major steel-using sectors.

But even Japan's foreign forays are at risk from competitors' rising steel exports.

In Brazil, steel imports almost tripled in the first eight months of this year, forcing Nippon Steel Corp and affiliate Usiminas to ditch a plan to build a 3 million tonnes a year plant there.

Realignments by Japanese steelmakers are unlikely to substantially improve their competitive edge, said Jeremie Capron, an analyst at CLSA.

"Shutting down domestic plants will cut costs by only 3-5 percent, not 15 percent," he said. "They should go to low-cost countries like India, Brazil and Russia."

He sees Japanese firms' partnerships with top Indian steelmakers as an advantage in obtaining footholds there. JFE, in particular, is seen benefiting from its tie-up with JSW Steel, which already has approval for new plants.

Japanese media report that Nippon Steel is in talks with Tata Steel Ltd on an integrated steel plant in India. Nippon has declined to comment.