TOKYO Oct 1 The head of Nippon Steel & Sumitomo
Metal Corp said the newly merged company forming the
world's second-biggest steelmaker will embark on further cost
cutting in a bid to counter a slump in the price of the metal.
The $22.45 billion merger was forged last year after both
companies had suffered several years of sliding profits, the
result of a strong yen and competition from Asia's fast-growing
and lower-cost rivals.
As the merged entity debuts Monday on Tokyo's stock
exchange, Chief Executive Shoji Muneoka said the company will
come up with new cost cutting measures by March on top of a
previously announced target of stripping out 150 billion yen
($1.9 billion) in annual costs by 2015.
"The market outlook is uncertain due to a large
demand-and-supply gap in Asia," Muneoka told a small group of
reporters on Sept. 24. The release of his comments was embargoed
until Oct. 1.
"But we'll survive if we have a cost edge," he said.
Nippon Steel & Sumitomo is not alone in feeling the pinch
from the slide in steel prices that has tracked the slowdown in
China's economic growth and pullback in European demand.
China's biggest-listed steelmaker Baosteel said
last week it had suspended output at a 3 million tonne-a-year
plant in one of the first public announcements of a shutdown by
a major mill in the world's biggest market for the metal.
Producers in Germany, the European Union's biggest
steelmaker, have cut crude steel output by 5 percent so far this
year compared with a year earlier, the country's steel industry
association said in September.
Muneoka estimated producers would have to idle 500 million
tonnes of steelmaking capacity to match global demand, which he
put at 1.5 billion tonnes a year. China accounts for 200 million
tonnes of the surplus capacity, he said.
Nippon Steel & Sumitomo has steelmaking capacity of 50
million tonnes a year, second only to ArcelorMittal,
which produced more than 97 million tonnes of crude steel in
It plans to boost that to as much as 70 million tonnes a
year by expanding in emerging markets, particularly in Asia.
But for now Muneoka said the focus was on cutting costs by
streamlining the downstream capacity of the merged company
mainly in Japan.
He said the firm aimed to maintain upstream crude steel
capacity in Japan of around 50 million tonnes a year -- now
running at nearly 90 percent of capacity thanks to steady export
Nippon Steel & Sumitomo's 16 Japanese-based mills are
scattered throughout Japan, adding to costs. In contrast, South
Korea rival POSCO, the world's fourth biggest
steelmaker, has its production capacity on just two sites.
That helps explain Nippon Steel & Sumitomo's push for
further cost cuts, said Yuji Matsumoto, an analyst at Nomura
"Because a gap in production cost between Nippon Steel and
POSCO is large, the planned 150 billion yen cost cut isn't
enough," Matsumoto said.
The company aims to outline its consolidation plans for
Japan in December and provide details by March, Muneoka said.
Muneoka didn't mention job cuts, but in September 2011 the
company said it had no intention of laying off workers.
WEAK FINANCIAL HEALTH
Core profits at Nippon Steel and Sumitomo Metal fell rapidly
after the Lehman collapse sparked the global financial crisis as
a rally in the yen squeezed their competitive edge. Since the
crisis, investors have used the yen as a safe haven.
That pushed down the combined firm's operating
profit-to-sales ratio to 2.8 percent for the year to March 2012.
That compared with 10.7 percent for POSCO and 4 percent for
Baosteel in the year to March 2011, Reuters data shows.
While steel prices are still in a downtrend, the cost of
steelmaking raw materials like iron ore and coal have resumed
rising again, Muneoka said, suggesting further cost pressures.
"We expect it to stay at a plateau (high level)," Muneoka
said, referring to raw materials prices.
Beijing's approval of more than $150 billion budget for
infrastructure projects and easier monetary policy in Japan, the
United States and Europe pushed up prices of ore .IO62-CNI=SI
in the first half of September. But at $104.20 a tonne, iron ore
is still down 25 percent this year.
The merged company expects a pretax recurring profit of 20
billion yen on revenue of 2.67 trillion yen for the
The two firms took a combined impairment loss against
loss-making domestic assets of 240 billion yen ($3 billion) for
the first half.
Muneoka said the merger will allow Nippon Steel to shift
more money and manpower to overseas projects, particularly to
Asia, where he sees infrastructure spending spurring demand.
The company will start producing high-end automotive steel
sheets in India, Mexico and Thailand in 2013, in addition to the
production in Brazil, the United States, China and Europe.
Its recent acquisition of a 50 percent stake in Australia's
Bluescope Steel gives Nippon Steel access to Asia's
construction steel market, Muneoka said.
(Editing by Neil Fullick)