Nippon Steel, Sumitomo Metal to Cut India Partner After Merger

Nippon Steel Corp. (5401) and Sumitomo Metal Industries Ltd. (5405) plan to choose a single partner in India to avoid project duplication as they prepare to combine to create the world’s second-largest steelmaker.

“We cannot compete in the same countries or same regions” within the new company, Nippon Steel Executive Vice President Shinichi Taniguchi said in an interview. The Tokyo-based company is building a plant with Tata Steel Ltd. (TATA), while Sumitomo Metal is in construction talks with Bhushan Steel Ltd. (BHUS)

Nippon Steel, Japan’s biggest mill, and Sumitomo Metal are seeking regulatory approval to combine to speed global expansion. They are racing against rivals including JFE Holdings Inc. (5411), South Korea’s Posco (005490) and ArcelorMittal (MT) to tap demand for steel in India, the second-fastest growing major economy.

The two companies will hold talks on overseas partners as soon as they sign a contract next April, Taniguchi said June 3 in Tokyo. “We will examine how much compensation will need to be paid to each partner, if a contract is called off.”

The mobile phones of Bhushan Steel’s Managing Director Neeraj Singal and Finance Director Nittin Johari were switched off. Tata Steel’s spokesman Prabhat Sharma could not be immediately reached on his mobile phone.

In January, Nippon Steel signed a contract with Tata, India’s largest steelmaker, to build a 40 billion yen ($498 million) factory in the partner’s Jamshedpur complex to produce automobile steel sheets in 2013, and has said they would also look to broaden an alliance.

Bhushan, a maker of automotive steel, has offered Sumitomo Metal, the third-largest Japanese steelmaker, as much as 40 percent of a planned factory in West Bengal, Singal said Dec. 16, 2009.

Twice the Pace

India’s consumption of the alloy is forecast to grow 13.3 percent in 2011 and growth will accelerate to 14.3 percent next year, more than twice the pace of global demand, according to an April 18 report by the World Steel Association.

Nippon Steel and Sumitomo Metal have yet to hold talks because they are still unable to study each others’ contracts with overseas partners, Taniguchi said. The bigger company will have more resources to expand in targeted markets including India, Southeast Asia and Brazil, he said. The merger is set for completion by October 2012.

“Our target is to expand globally,” he said. “The most important part of the merger is to combine the two companies’ managerial resources, then invest in growing markets and see returns.”

The Japanese steel merger, unveiled Feb. 3, is backed by the government and business leaders, including Trade Minister Banri Kaieda, Chief Cabinet Secretary Yukio Edano and Hiromasa Yonekura, the head of Japan’s biggest business lobby. Prime Minister Naoto Kan’s Cabinet approved a bill to encourage takeovers a week after.

Japan Quake

Nippon Steel and Sumitomo Metal are seeking to expand overseas as they no longer expect high growth in Japan, where the March 11 earthquake and tsunami exacerbated the outlook of the stagnating economy. Efforts to rebuild devastated areas won’t likely create enough demand for steel anytime soon and the size of the demand might be smaller than he initially anticipated, Taniguchi said.

Still, the pace of recovery at automakers is faster than Nippon Steel forecast, he said, after the quake disrupted supply chains of companies from Toyota Motor Corp. to chipmaker Renesas Electronics Corp.

Steel output at Nippon Steel may return to “normal levels” as soon as the next quarter as carmakers boost output to make up for shortfall in the current three months, he said. The steelmaker now expects to produce as much as 7.7 million metric tons, excluding affiliates, in this quarter, higher than the May estimate of 7.6 million tons. That’s below 8.26 million tons the preceding quarter.

To contact the reporters on this story: Masumi Suga in Tokyo at msuga@bloomberg.net; Yasumasa Song in Tokyo at ysong9@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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