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Steel Industry Overview

11, 01. 2004

Current State

Record Earnings Forecast through Increased Demand in China and Favorable Effects of Reorganization

A converter at Oita Works of Nippon Steel Corporation
A converter at Oita Works of Nippon Steel Corporation
 

  The Japanese steel industry is marking rapid recovery.It has pulled itself out of what had been a never-before-seen difficult situation that had been triggered by factors including a demand by Nissan Motor Co., Ltd. to make huge reductions in steel prices.
   In fiscal year 2003, the volume of crude steel production, which had fallen to under the 100-million-ton level in FY1998 and FY1999, recovered reaching 110.98 million tons. It was the first time in 13 years for steel production to exceed 110 million tons in Japan. Full capacity production is presently continuing in FY2004, and the odds are good that crude steel production will exceed 110 million tons for the second consecutive year. Corporate business performance is also in excellent shape. The FY2004 consolidated current incomes of Nippon Steel Corporation, JFE Holdings, Inc., Sumitomo Metal Industries, Ltd., and Kobe Steel, Ltd. combined is forecast to surpass 900 billion yen, greatly exceeding the past record of 577.6 billion yen marked in FY1989.

Reorganization of the Industry Advances

One of the factors for this rapid recovery is the growth of the Chinese market. Another is the strengthening of price bargaining power as a result of the advancement of consolidations within the industry.

Chinese steel demand(apparent consumption; namely domestic production plus imports, minus exports) in 2001 was 153.4 million tons, a 20 percent year-on-year rise. Demand expanded to 185.6 million tons in 2002, and swelled further to 232.4 million tons in 2003. While there is concern of a slowdown in 2004 caused by a credit squeeze, the forecast is that the year's steel demand in China will be more than 260 million tons.
   Meanwhile, as the Japanese steel industry was fighting a bloody price war from 2000 onward, NKK Corporation and Kawasaki Steel Corporation consolidated their business in September 2002 by establishing themselves under JFE Holdings. (Operational companies under the JFE Holdings umbrella were later reorganized in April 2003, and the steel division became JFE Steel Corporation.) Nippon Steel, Sumitomo Metal, and Kobe Steel also reached agreement in November 2002 for alliance and cross-ownership of minority stakes. While there were once five blast furnace steelmakers in Japan, there are now two groups - Nippon Steel and JFE Holdings - as a result of the advancement of reorganization..

Price Bargaining Power Recovers

Product warehouse of Kimitsu Works of Nippon Steel Corporation, Chiba Pref.
Product warehouse of Kimitsu Works of Nippon Steel Corporation, Chiba Pref.

 While global reorganization of mining majors (iron ore, raw coal, etc.) was taking place upstream from the late 1990s, the same was occurring downstream within the automotive industry, which is the Japanese steel industry's largest group of users. Steelmaker foundations began to loosen as companies were sandwiched between upstream pressure for hikes in purchasing prices, and downstream pressure for the reduction of selling prices.
   However, due to the tightened supply-demand situation triggered by the growth of demand in China as well as the favorable effects of reorganization, Japanese steelmakers were able to implement, for the first time in five years, a markup in the price of automotive steel sheets. Steel manufacturers again implemented price reforms twice, in the spring and autumn of 2004, signs that they had recovered their price negotiating power. The Japanese steel industry has been able to do away with its branding as a matured or declining industry and has moved one step toward the restoration of its status.

History

Becomes a Matured Industry after the First Oil Shock

The history of the Japanese steel industry can be divided into three periods: the period of growth that began after the end of World War II and continued until the first oil shock; the period of maturation up to the bursting of the economic bubble; and the period of challenge that followed. Japan's steel industry achieved rapid growth after the end of World War II. While the volume of crude steel production was 500 thousand tons in FY1945, it manufactured ten times that amount in FY1950 (5.29 million tons), recovering the prewar level of production. The industry grew at a rapid pace, and in FY1973, the volume produced expanded to 120.01 million tons. There were several factors behind such high growth.
 One factor was steel demand, which initially increased through the demand of postwar reconstruction and was later followed by the demand created by the high growth of the Japanese economy. Exports also made a great contribution. In 1969, Japan surpassed West Germany to become the world's largest exporter of steel. An especially large factor was the active capital investment made by steel manufacturers. For a few years following the end of World War II, there were only two integrated blast furnace steel manufacturers in Japan: what is known today as Nippon Steel (called Japan Iron & Steel Co., Ltd. at the time and later dissolved to form Yawata Iron & Steel Co., Ltd. and Fuji Iron & Steel Co., Ltd.), and NKK.

Tobata No.4 blast furnace at Yawata Works of Nippon Steel Corporation ,Fukuoka Pref.
Tobata No.4 blast furnace at Yawata Works of Nippon Steel Corporation ,Fukuoka Pref.

However, Kawasaki Steel, Sumitomo Metal and Kobe Steel advanced, in succession, to the blast furnace arena during the 1950s. From the 1960s to early 1970s, steel manufacturers not only expanded their existing steel mills but also built new, large-scale steel mills in coastal areas (by Yawata Iron & Steel in Kimitsu; Fuji Iron & Steel in Oita; NKK in the Keihin district; Kawasaki Steel in Mizushima; Sumitomo Metal in Kashima; and Kobe Steel in Kakogawa) thereby driving high growth

Blast Furnace Shut-downs Occur in Series

However, such high growth of the steel industry came to an end when the Japanese economy entered a period of stable growth following the Nixon Shock of 1971 and the Oil Shock of 1973. This was the period of maturation. While there was stable growth in domestic demand, exports, which had been a driver of high growth, became sluggish due to the intensification of trade friction with the United States and other countries. Crude steel production peaked at the FY1973 volume of 120.01 million tons and hit the ceiling. It should be noted, however, that Japan was able to maintain a high level of production for the most part at between 100 and 110 million tons. Furthermore, a type of cooperative framework was established within the industry that was triggered by the birth of Nippon Steel through the 1970 merger of Yawata Iron & Steel and Fuji Iron & Steel. Although its position as the leading industry in Japan has been overtaken by the automotive and electronics industries, the steel industry was able to maintain stable earnings and keep up its prestige as a Japanese industry. A major turning point, however, was the Yen Shock of 1985. Through the sudden appreciation of the value of the yen, Korea caught up in the export market. Furthermore, electric furnace steel manufacturers were in hot pursuit in the domestic market, with Tokyo Steel Manufacturing Co., Ltd., rapidly expanding its share in Type H steel, an area that had been the stronghold of blast furnace steel manufacturers. Major steel users such as automobile and electronics manufacturers were intensifying a shift to manufacturing abroad, and blast furnace steel makers were forced to make full-scale downsizing. In 1987, Nippon Steel decided to shut down one blast furnace unit each at its steel mills in Yawata, Kamaishi, Hirohata, Muroran and Sakai. Other manufacturers also launched full-scale rationalizations, and as of the end of the 1990s, the number of blast furnaces, which in 1984 had been 65 units, decreased to 45 units.

Unsuccessful Diversification Moves

The period of about 10 years following the bursting of the economic bubble became a challenging one, including diversification, disposal of left-over debts, and an intensified price war that originated with the Ghosn Shock. An upturn in domestic demand during the economic bubble had recovered the volume of crude steel production to 111.71 million tons in FY1990. However, in the recession following the bursting of the bubble, production fell to below 100 million tons in 1992. Although the volume later picked up temporarily, the volume produced almost fell below the 90-million-ton level (at 90.97 million tons) in 1998 when financial depression and the Asian economic crisis escalated. Blast furnace steel manufacturers spurred their diversification efforts, such as by advancing into semiconductors. However, such moves for diversification had virtually all ended in failure by the late 1990s. Furthermore, manufacturers were forced to post massive amounts of extraordinary losses due to accounting changes (triggered by the financial depression of 1997) towards the globalization of accounting standards.

The Outbreak of the Ghosn Shock

 Not only did the composition of corporate finances take changes for the worse but, in 2000, the so-called Ghosn Shock also occurred. Nissan narrowed down the number of its steel suppliers while also demanding major price cuts. The cooperative procurement framework that had existed up to then collapsed, and an intense price war ensued. The business performance of blast furnace steel manufacturers took major hits as a result, and there were even companies whose shareprices fell below par. While credit insecurity spread under such circumstances, NKK and Kawasaki Steel reached basic agreement in April 2001 to merge their business, completing their merger in September 2002 in the form of the establishment of JFE Holdings. Meanwhile, Nippon Steel, Sumitomo Metal and Kobe Steel had reached an alliance agreement by December 2001, and they implemented cross-ownership of minority stakes in November 2002. Blast furnace steel manufacturers went from a framework of five companies to a system under two groups: JFE Holdings and Nippon Steel.

Three Key Points towards the Future

Point 1
The Business Climate of the Chinese Market

The materials quay of Kimitsu Works of Nippon Steel Corporation, Chiba Pref.
The materials quay of Kimitsu Works of Nippon Steel Corporation, Chiba Pref. ]

 The most important factor to consider in forecasting the future of the Japanese steel industry is the movement of the Chinese market. There is a tendency, in terms of steel demand, for it to increase rapidly once per capita demand surpasses 100 kilograms through the country's social infrastructure and the popularization of automobiles and consumer electronics. The Japanese steel industry entered its period of expansion in the 1950s when per capita demand surpassed 100kgs. Korea's per capita steel demand exceeded 100kgs in the 1970s, and it achieved high growth. In the case of China, per capita steel demand exceeded 100kgs in 1999, and so it will now be entering a full-fledged period of steel diffusion. Furthermore, China has two major projects - the 2008 Olympic Games in Beijing, and EXPO 2010 Shanghai - coming up ahead. Although there may be some undulation, the likelihood of constant growth is very high, and the Japanese steel industry can look forward to gaining a very large following in China.

Point 2
Can a Decline in International Ranking Be Prevented?

  On the other hand, growth in China does contain the risk of a decline in the international ranking of the Japanese steel industry. Japan surpassed the United States in 1982 to become the world's largest producer of crude steel. It maintained this top position even after the Yen Shock of 1985 and the bursting of the economic bubble in 1990. However, the position was reversed in 1998 by China. Continued growth is being marked in China, and in 2003, it marked a volume of 220.1 million tons, twice the amount manufactured in Japan.
   In terms of company scale, Nippon Steel is still the second largest in the world following Europe's Arcelor S.A. JFE steel is keeping a relatively leading position as the fourth biggest in the world. However, Chinese companies are showing remarkable growth. While there was not a single Chinese steel producer in the world's top twenty ranking in 1990, Shanghai Baosteel Group Corporation jumped into sixth place and Maanshan Iron & Steel Co. Ltd. slipped into 19th place in 2003. To top it off, Shanghai Baosteel is currently constructing a new steel mill, and a flurry of other Chinese blast furnace steel manufacturers have announced construction of new blast furnaces. Furthermore, POSCO of Korea, said to be Japan's biggest rival, is also advancing plans to step up production.

Point 3
Can Japanese Steel Manufacturers Maintain its Superior Technology in High-class Steel Sheets, etc

The area that is thought to take the biggest hit from stepped up production and investment in China, etc. is construction-related steel, such as bar steel and die steel. With increased real estate investments such as the Beijing Olympics and 2010 EXPO in the background, it is certain that high growth will continue in the field of construction-use steel for the next several years in China. However, supply will surpass demand once major projects such as the Olympics and EXPO are completed. That means that China will shift from being an importer to exporter, and there is no doubt that its effect will be felt in Japan.

Meanwhile, unlike steel for construction use, stable growth in other application fields such as automotives and electronics can be expected in China even after the conclusion of big projects as a result of enhanced living standards in the country. Fortunately, Japanese blast furnace steel manufacturers are technologically one step ahead in the production of high-quality steel sheets used for automobiles and electronics. In terms of automotives, Nippon Steel has established a supply structure in the three major points of the world through a merger with Ispat Inland Inc. in the United States and an alliance with Arcelor in Europe. While a fall in global ranking in terms of scale remains a future possibility, it will be up to the management capabilities of Japanese blast furnace manufacturers to see how they can maintain their international rankings.

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