Japanese Steel Takeover Driven by `Radical' Shift as Costs Rise

Feb 4, 2011 2:12 PM GMT+0530
By Masumi Suga and Rebecca Keenan

Nippon Steel Corp. and Sumitomo Metal Industries Ltd.’s plan to create the world’s second-largest steelmaker is aimed at gaining leverage over raw-material purchases and metal pricing as costs soar. Shares in both companies surged the most in more than two years today.

Based on Sumitomo’s market value and net debt, the deal would be worth more than 2 trillion yen ($24.5 billion), according to data compiled by Bloomberg. Yesterday’s announcement of the accord, which may be Japan’s biggest non- bank takeover, said it would be completed by October 2012.

Steelmakers in Japan, the world’s second-biggest producer of the alloy, are seeing profits squeezed while market-leader China encourages consolidation to create globally competitive companies. Rising costs for iron ore and coking coal used to make steel forced Nippon Steel to cut its full-year earnings forecast last week. Sumitomo Metal did the same today.

“The purpose of this merger is to fend off competition from rivals in China, South Korea and India,” said Takashi Murata, an analyst at Daiwa Securities Capital Markets Co. in Tokyo. A bigger company has more clout to negotiate raw-material costs and set steel prices for buyers including automakers, he said.

Share Reaction

Sumitomo Metal Industries rose 16 percent to 224 yen at the close of trading in Tokyo for the biggest advance since Oct. 30, 2008. Nippon Steel ended at 313 yen, up 9.1 percent, after rising as much as 14.3 percent, the most since Oct. 28, 2008.

Before today, Nippon Steel shares had fallen 16 percent in the past year, compared with a 3.2 percent decline for Luxembourg-based ArcelorMittal and a 17 percent drop for South Korea’s Posco, the world’s third-biggest producer. Sumitomo Metal had fallen 26 percent in the year before today.

The proposed merger between Sumitomo Metal Industries and Nippon Steel will create synergies for both companies as well as benefit “the wider steel industry by helping to increase pricing and margins,” Goldman Sachs Group Inc. analysts Rajeev Das and Nana Hasegawa said in a report today.

The merger is positive for Nippon Steel because of benefits arising from the combined size of the two companies, Standard & Poor’s said today in a statement.

‘Radical Change’

A combination of the two producers, which haven’t outlined terms of the transaction, would form the world’s second-largest steelmaker, based on output of 47.8 million metric tons in 2010, Sumitomo Metal Industries President Hiroshi Tomono said at a press briefing yesterday. ArcelorMittal is the biggest producer.

“We see a radical change in the business environment surrounding the Japanese steel industry,” Muneoka told reporters at the briefing.

Nippon Steel, formerly the world’s second-largest steelmaker by production, lost that rank in 2009 after being overtaken by five Chinese mills, according to the American Institute for International Steel.

Meantime, rivals are expanding, with South Korea’s Posco on Jan. 31 winning approval for a $12 billion steel plant in India, the biggest single foreign investment in the country.

“It’s very important Japanese steelmakers be globally competitive,” said Japanese Economy Minister Kaoru Yosano today. The planned merger of Nippon Steel and Sumitomo Metal Industries is “welcomed” he said.

Steel Demand

Steel consumption may rise 5.3 percent this year to a record, according to World Steel Association forecasts. Iron ore prices rose last year after Rio Tinto Group, BHP Billiton Ltd. and Vale SA, the biggest suppliers, shifted away from annual pricing to quarterly agreements.

The price of iron ore will be 21 percent higher on average this year, Credit Suisse Group AG said in a Jan. 7 report. The spot price of ore delivered to China including freight will average $178 a ton, the report forecast. That compares with $147 in 2010, according to The Steel Index.

Floods in Australia’s Queensland state closed mines and further pushed up coking-coal prices. Free-on-board prices may surge to $400 a ton for the three-month contract starting April 1, from $225 this quarter, Bank of America Merrill Lynch said last month.

“It’s all about lowering costs and enhancing margins,” Gavin Wendt, a senior resources analyst at Mine Life Pty in Sydney, said by phone. “While demand for steel is quite strong, one of the problems for steelmakers around the world is rising costs. It may give them more leverage when it comes to dealing with the miners.”
(sourced: bloomberg.com)