Nippon Steel Corp and Sumitomo Metal Industries 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, while Sumitomo Metal is in construction talks with Bhushan Steel.
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, South Korea’s Posco and ArcelorMittal, 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 in April next year, Taniguchi said on Friday in Tokyo.
“We will examine how much compensation will need to be paid to each partner if a contract is called off,” Taniguchi said.
India’s consumption of the alloy is forecast to grow 13.3 percent this year 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 other’s 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 next year.
“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 on Feb. 3, is backed by the government and business leaders, including Japanese Minister of Economy, Trade and Industry Banri Kaieda, Chief Cabinet Secretary Yukio Edano and Hiromasa Yonekura, the head of Japan’s biggest business lobby. Japanese Prime Minister Naoto Kan’s Cabinet approved a bill to encourage takeovers a week after.
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.
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