Nippon Steel Pushes Merger Cost Cuts as Asia Mill Deferred

Nippon Steel & Sumitomo Metal Corp., the world’s biggest steelmaker by market value, will accelerate its cost-cutting targets and defer a decision to add capacity with an overseas integrated steel mill.

Overcapacity in China has led to excess supply in Southeast Asia, the steelmaker’s target export market, and the glut may not be resolved for years, Chief Executive Officer Shoji Muneoka said in an interview in Tokyo. The company will put profit before volumes by reorganizing its 16 existing steelworks in Japan, he said.

“A company which doesn’t consider risks and expands excessively could go bankrupt,” said Muneoka, who took office on Oct. 1 last year, when the company was formed by the merger of Nippon Steel Corp. and Sumitomo Metal Industries Ltd. “It costs several hundred billion yen to build a blast furnace. So far it has been right for us not to do that.”

The Tokyo-based company’s market value has doubled to 3.2 trillion yen ($33 billion) since the two companies combined, becoming the world’s most valuable steel company for the first time in seven years. Competitiveness has been boosted by the 15 percent fall in the value of the yen against the dollar that followed Prime Minister Shinzo Abe’s election victory in December. The company is also reaping the benefits of efficiencies generated by its merger.

Integration Card

“Integration is our card, which only we have been granted among steel companies, enabling extra cost cuts,” the CEO said. “We intend to play the card to be more competitive.”

Muneoka said he expects to achieve a cost-cutting goal of 200 billion yen annually in the three years after integration ahead of schedule, without giving a new frame. The company plans to cut assets by 300 billion yen by March, a year and half ahead of target, he said.

Under its existing business plan running through March 2016, the company will close one of its 14 blast furnaces and shut 14 production lines to streamline domestic facilities. The company won’t decide on investing in an overseas integrated steel mill in Asia until that business plan is completed, Muneoka said.

Nippon Steel’s shares rose 5 yen, or 1.5 percent, to 338 yen at the close in Tokyo trading. The benchmark Nikkei 225 Stock Average gained 0.2 percent.

Overseas Furnace

Nippon Steel’s rivals have seen their market value slide in the past year, with shares in Posco, South Korea’s biggest steelmaker, losing 13 percent for a capitalization of 27.9 billion won ($25.9 billion). ArcelorMittal, which is about twice as big as Nippon by production, has seen its shares fall about 12 percent, for a market a value of 16.8 billion euros ($22.6 billion).

Even before its merger, Nippon Steel studied building an overseas blast furnace to move closer to customers expanding outside Japan. In Southeast Asia, demand for steel has risen as Japanese automakers expand production to tap growth. It’s a member of the group that controls Usinas Siderurgicas de Minas Gerais SA, or Usiminas, Brazil’s biggest producer of automotive steel and an owner of blast furnaces.

Nippon Steel also has steel rolling facilities with partners in countries including Thailand, China, and the U.S.

A Posco-PT Krakatau Steel group and Formosa Plastic Corp. are among companies planning to build new steel plants in Southeast Asia, further threatening a glut.

China added 440 million tons of capacity in the six years to 2012, bringing the total to 976 million tons, UOB Kay Hian Ltd. said in an August report, citing data from the China Iron and Steel Association. Another 130 million tons will be added in the three years through 2015.

Domestic competitor JFE Steel Corp. has said it will need more time to decide on a $3 billion project to build an overseas integrated mill. The steelmaker said in March 2012 it was studying a blast furnace in Vietnam, its first outside Japan.

Before it's here, it's on the Bloomberg Terminal.