Two of Japan’s biggest steelmakers are to formally merge today, creating the world’s second-largest firm in the sector as they look to outpace their Chinese and South Korean rivals.
Nippon Steel, the nation’s no. 1 steel company and third-ranked rival Sumitomo Metal Industries will combine to form a company second only to India’s ArcelorMittal.
Global competition in the steel industry has intensified in recent years even as demand has been spurred by emerging economies such as China, which are undertaking massive construction, infrastructure and manufacturing projects.
However, economic fears have weighed on steel demand and Japanese producers have struggled with an unfavorable exchange rate, which saw the yen hit record highs against the US dollar late last year.
Even with their economies of scale, Nippon Steel & Sumitomo Metal Corp will still be a distant second to behemoth ArcelorMittal, with less than half of its annual production.
Last year, ArcelorMittal produced 97.2 million tonnes of crude steel, while Nippon Steel, ranked sixth-largest, and Sumitomo Metal, ranked 27th, produced a combined 46.1 million tonnes, according to the World Steel Association.
The launch comes at a difficult time for the Japanese steel industry.
It is “not a very good environment,” Hiroshi Tomono, Sumitomo Metal president, who will become the new company’s No. 2, told reporters last week, the Yomiuri Shimbun reported.
“We have an overwhelming advantage in terms of quality, but [production] costs are our problem,” Tomono said.
A senior Nippon Steel official said the Japanese firm would do well at the top end of the market, but would face difficulties competing with the lower cost bases of other Asian steelmakers.
“We have a significant competitive edge in terms of highly functional steel products, but Chinese and South Korean steelmakers are catching up with us in terms of middle-level steel products,” Nikkei Shimbun quoted the unnamed official as saying.
Nippon Steel and Sumitomo Metal filed 908 international patent applications between 2006 and 2010, nearly four times that of South Korea’s Posco and nine times the number ArcelorMittal submitted, Japanese dailies said.
The merged company will aim to realign and strengthen a global network “in response to increasing worldwide demand for steel and the local procurement needs of Japanese steel consumers operating overseas,” they said in a statement.
It will focus on reorganizing and expanding manufacturing, processing and sales bases in emerging countries, namely China, Brazil, India and Southeast Asian countries.
The new company “will aim to achieve 60 to 70 million tonnes in terms of global production capacity by further accelerating its overseas business development,” a statement said.
The merger, under the ratio of 0.735 Nippon Steel shares to one Sumitomo Metal share, will be the first in the Japanese steel industry since the creation of the country’s No. 2 firm JFE Holdings around a decade ago.