Steel Industry Overview
11, 01. 2004
Record Earnings Forecast through Increased Demand in China and Favorable Effects of Reorganization
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.
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.
Price Bargaining Power Recovers
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.
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.
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