ANALYSIS-Japan steelmills eye mines as growth outlook dims

* Possible investments in Australia, Brazil mines, plants
* More South Korean capacity may dent Japan exports
* Downward pressure on contract sheet price
* SAIL, JSW, POSCO seen winners in Asia

By Yuko Inoue
TOKYO, April 15 (Reuters) - Japanese steel makers, battered
by weak demand for cars, electronics and machinery, may cash in
on a strong yen and buy iron ore mines and production lines
overseas to get ready for a rebound - whenever that may come.
After years of record profits and a sector restructuring in
the 1990s, the country's mills are financially sound, but face
increasingly tough competition in the top-end sheet steel market.
If they stand still, they may lag rivals when demand returns.
"Their decisions this year and next will be crucial to their
future," said Yuji Matsumoto, analyst at Nomura Securities. "They
need to take the necessary measures or suffer a serious loss of
competitive edge."
He said Japanese steelmakers should consolidate and raise
stakes in mines to boost their bargaining clout with top raw
material producers such as BHP Billiton . High
input costs and lower product prices are expected to hit mills'
profit margins this year.
Japanese mills have a fair chance to tap iron ore bargains in
Australia and Brazil if they team up to bid, with government
financial back-up, said a government official, who asked not to
be identified due to the sensitive nature of the issue.
Already, there are signs they are on the move.
Japanese mill consortiums have bid on several iron ore assets
in the past six months, but pulled back due to high prices, said
two sources, one of whom had direct knowledge of the matter.
India's Bhushan Steel has said it was in early talks with
Sumitomo Metal Industries Ltd <5405.T>, Japan's No. 3 steelmaker,
about building a steel plant in West Bengal. [nT99351]
Sumitomo Metal may also team up to invest overseas with China
Steel <2002.TW>, according to Taiwan's biggest steelmaker's
chairman. [nTP168235]
"India and China will become the core of growth," said
Mitsushige Akino, chief fund manager at Ichiyoshi Investment
Management Co. "They should actively invest in the early stages
of growth if there is a chance and a partner."

SLOW RECOVERY, LOWER MARGIN
The biggest worry for Japan's mills is that a rebound in
demand for cars, consumer goods and industrial machines will be
slow.
Products made by household names like Toyota Motor <7203.T>
Panasonic <6752.T> and Komatsu <6301.T> use high-end, special
sheet steel supplied almost solely by Japan's top blast furnace
steelmills, led by Nippon Steel <5401.T> and including JFE
<5411.T>, Sumitomo Metal and Kobe Steel <5406.T>.
Those major clients are running at 10-60 percent capacity,
reeling from a slump in demand and a strong yen that hurts
exports. Takashi Aoki, senior fund manager at Mizuho Asset
Management Co, says it could take 4-5 years for demand to recover
to last year's levels.
Crumbling global car sales are particularly bad news.
Sales of autosheet account for up to 40 percent of Japanese
mills' non-specialty steel, double the level at South Korea's
POSCO <005490.KS>, which also threatens to muscle in on some
traditional markets -- selling galvanised steel sheet to Sony
Corp <6758.T> for LCD TVs made outside Japan and supplying an
increasingly cost-conscious Toyota. [nSEO179617]
[nSEO38271]
Weak local currencies have made POSCO and Russia's Severstal
more competitive in export markets, hitting Japanese
mills' margins, and ramped up production in South Korea could see
big Japanese steel clients there turn to domestic suppliers.
Exports to the rest of Asia account for 30 percent and 40
percent respectively of Nippon Steel's and JFE's revenues.
Nor are government stimulus packages likely to help much as
Japan's mills are less involved in construction steel than, say,
India's Tata Steel or China's Baosteel <600019.SS>.
"We see many worrying factors that dim their (Japanese mills)
growth outlook," said Atsushi Yamaguchi, analyst at UBS.
"Over the summer, global basic materials stocks could
outperform, helped by an increase in Chinese consumption and an
improvement in global economic data, but we think Japanese mills
will underperform the global steel sector."
On top of the POSCO threat, a Japanese mini-mill, Tokyo Steel
Manufacturing Co <5423.T>, is in talks to supply Toyota with
sheet made from steel scrap.
"The moves will certainly put downward pressure on their
contract sheet price," said Nomura's Matsumoto.
Japanese steel and car makers are due to open talks soon on
contract prices for autosheet, with mills facing steep cuts even
though the price of coal, a key raw material, has fallen by less
than had been expected.
Nippon Steel last month won a 57 percent cut in the price of
coking coal for 2009/10 year from the BHP Billiton Mitsubishi
Alliance, the world's biggest coking coal miner.
Both UBS and Nomura expect Japan's four steelmills to post
2009/10 net losses on lower prices and volumes. They see Japan's
crude steel output falling nearly 30 percent from a record 120
million tonnes in 2008/09.

For Nippon Steel profit estimate, click
http://graphics.thomsonreuters.com/apr09/JP_NPNFY0409.jpg

While the global steel sector faces a tough ride, Steel
Authority of India , JSW Steel and POSCO are
among possible outperformers, analysts said, as Indian demand is
seen holding up and POSCO is the sole blast furnace operator in
South Korea, a net steel importer.
(Editing by Ian Geoghegan)
((yuko.inoue@thomsonreuters.com; +81-3-6411-1815; Reuters
Messaging; yuko.inoue.reuters.com@reuters.net))
((If you have a query or comment on this story, send an email to
news.feedback.asia@thomsonreuters.com))

Keywords: STEEL JAPAN/

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Keywords: STEEL JAPAN/

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Keywords: STEEL JAPAN/

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