Japan's smaller mills steeled for shakeout

By Yuko Inoue - Analysis

TOKYO (Reuters) - Japan's $12 billion construction steel industry, facing overcapacity, a weak market outlook and the threat of a flood of Chinese imports, is set for a shakeout that could trim nearly three dozen players to fewer than 10.

Market leader Nippon Steel Corp (5401.T: Quote, Profile, Research, Stock Buzz) is leading a drive to streamline a fragmented, low-valuation industry as it looks to cement its position by expanding capacity and tightening its grip on a highly volatile sector that can impact the upper-end market for automotive sheet and shipbuilding plate.

Japan's top steelmaker has snapped up or raised stakes in five small steel firms, including Nakayama Steel Works Ltd (5408.T: Quote, Profile, Research, Stock Buzz), Chubu Steel Plate Co (5461.NG: Quote, Profile, Research, Stock Buzz), Oji Steel Co and Hokkai Kogyo Co, as it seeks to raise its output of high-grade steel by shifting lower-end production to smaller affiliates.

Trading companies such as Mitsui & Co (8031.T: Quote, Profile, Research, Stock Buzz) are also selling off minority stakes in the underperforming sector to improve their investment portfolios.

"There are too many small companies in the Japanese market, even smaller than those in Taiwan and South Korea," said Kenji Inokuma, president of Godo Steel Ltd (5410.T: Quote, Profile, Research, Stock Buzz), a Nippon Steel affiliate. "A realignment is a must."

Japan's 10 million tonne market for steel bars is crowded by 30 small mills, which gather steel scraps from local building companies to melt down in electric furnaces, operating mostly at night to save on electricity costs.

The similar-sized South Korean steel bar market has fewer than 10 companies, a result of mergers and acquisitions in the late 1990s.

Top maker Hyundai Steel Co (004020.KS: Quote, Profile, Research, Stock Buzz) has 40 percent of the local steel bar market, with output of 3.7 million tonnes, more than three times that of Japan's top steel bar maker Kyoei Steel Ltd (5440.T: Quote, Profile, Research, Stock Buzz), which has 12 percent of the Japanese market.