JFE Plans to Spend $2.2 Billion on Iron Ore, Coal Mines as Costs Jump 90%

JFE Holdings Inc., Japan’s second- largest steelmaker, plans to spend as much as 200 billion yen ($2.2 billion) to invest in iron ore and coal mines in Australia and Brazil to double self sufficiency in materials as costs jump.

“We have two to three candidates” each for the iron ore and coal investments, Eiji Hayashida, the president of Tokyo- based JFE Steel Corp., said in an interview. The steelmaking unit of JFE plans to raise export prices by 20 percent to 30 percent in the July quarter from April to offset costs, he said.

JFE, Nippon Steel Corp. and Posco are seeking mine investments after Vale SA and BHP Billiton Ltd. took advantage of the economic recovery to put up the prices of iron ore and coal by as much as 90 percent for the April 1 quarter. Mills have to raise prices to pass on the higher costs, the World Steel Association said yesterday.

“Steelmakers will need to cooperate on securing the raw materials to maintain competitiveness over the small number of miners,” Yasuhiro Matsumoto, an analyst at Shinsei Securities Co., said in Tokyo.

JFE shares, which have fallen 11 percent this year, rose 0.9 percent to 3,250 yen as of 2:10 p.m. on the Tokyo Stock Exchange.

“We intend to make a decision within a year or two to bring our self sufficiency to 30 percent by 2013” from 15 percent to 16 percent, Hayashida, 59, said May 7 in Tokyo.

Photographer: Haruyoshi Yamaguchi/Bloomberg

A stack of stainless seamless pipes sit at JFE Steel in Japan. Close

A stack of stainless seamless pipes sit at JFE Steel in Japan.

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Photographer: Haruyoshi Yamaguchi/Bloomberg

A stack of stainless seamless pipes sit at JFE Steel in Japan.

Overseas Investments

The Japanese steelmaker said Dec. 17 it will invest 50 billion yen in the Byerwen coal mine in Queensland, Australia, including an acquisition of a 20 percent stake, its biggest investment in coal. JFE, with four other Japanese mills and Posco, in 2008 agreed to buy 40 percent of Brazilian iron ore producer Nacional Minerios SA for about $3.12 billion.

Prices of iron ore, trading near a two-year high, may continue to climb in the second and third quarter, Deng Qilin, chairman of the China Iron & Steel Association, said yesterday. Coal prices may jump 50 percent in the second half, Citigroup Inc. said last month.

The move by iron ore exporters this year to abandon the 40- year custom of setting annual prices in favor of quarterly contracts is a “very negative trend,” World Steel Association Chairman Paolo Rocca said. The higher costs and the change “will affect our customers,” he said.

JFE prefers to secure supplies through investments than use futures to hedge against price volatility, said Hayashida. The mill “strongly opposes” the derivatives because it “would cause speculative funds to flow into the markets,” he said.

Deutsche Bank AG and Credit Suisse Group AG started offering so-called iron-ore swaps in 2008.

Pass on Costs

Posco, Asia’s third-biggest steelmaker, raised May prices by as much as 25 percent because of higher costs.

JFE Steel only had a “moderate” gain in export prices this quarter, Hayashida said.

“The current export price levels have yet to reflect ingredient costs sufficiently,” Hayashida said. “We may be able to absorb the increased costs in the July-to-September quarter -- but if raw material prices go up further, we’ll have to raise prices further.”

The steelmaker is facing tougher price negotiations with Japanese customers as it’s seeking shorter-term contracts and asking them to share a surge in material costs, he said. Customers are used to setting steel prices annually, he said.

Domestic Talks

JFE is asking domestic customers for an increase in prices of 15,000 yen to 20,000 yen per metric ton, or about 20 percent higher than last year, to cover the higher costs in the April quarter, Hayashida said. Toyota Motor Corp. and Mitsubishi Heavy Industries Ltd. buy steel from JFE.

Crude steel production in Japan, the world’s second-largest after China, may reach 105 million tons for the fiscal year started April 1, Hayashida said. That’s 9 percent higher than the 96.5 million tons a year earlier, as domestic mills raise exports to China, India and Southeast Asia, he said.

Exports for JFE will account for more than 50 percent this fiscal year from a record 46 percent a year earlier.

JFE, which last year agreed to collaborate with JSW Steel Ltd. on automobile steel production, will make a decision on whether it plans to take a stake in the Indian company, or invest in a factory in the nation in the next six months, Hayashida said. The two companies will consider buying stakes in each other, JFE said Nov. 19, when they announced the tie up.

“We’re under discussion with a wide range of possibilities,” Hayashida said. Any planned purchase of JSW won’t exceed a 15 percent holding, he said.

To contact the reporter on this story: Masumi Suga in Tokyo at msuga@bloomberg.net

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