Steel merger to save ¥100 billion in costs: analysts

Bloomberg

Nippon Steel Corp. and Sumitomo Metal Industries Ltd.’s deal to create the world’s No. 2 steelmaker may shave as much as ¥100 billion off costs as the companies consolidate operations, according to analysts.

“The integration will create an added cost savings of ¥100 billion over the next three years,” said Toshiyuki Johno, a Tokyo-based analyst at Citigroup Inc, adding it may generate ¥2,000 for every metric ton of crude steel produced, based on estimated combined annual output of about 50 million tons.

The deal, which will combine Japan’s largest and third-biggest mills, is aimed at gaining leverage over raw material purchasing and prices as costs soar. The likely cost savings compare with about ¥1,600 per ton of steel created from Mittal’s takeover of Arcelor in 2006 to create ArcelorMittal, Nomura Securities Co. said.

The savings from combining production, cutting costs, unifying procurement and expanding sales will be between ¥75 billion to ¥100 billion, said Yuji Matsumoto, an analyst at Nomura.

Nippon Steel has eight steel mills and nine blast furnaces in Japan, and Sumitomo Metal has three mills and five blast furnaces. The mills are located close to each other in some regions, raising the prospect of consolidation.

Nippon Steel President Shoji Muneoka said Feb. 3 he isn’t thinking about starting consolidation soon, while Hiroshi Tomono, his counterpart at Sumitomo Metal, said he didn’t have specific plans. The companies plan to complete the deal by October 2012.

The likely cost savings will be smaller than those obtained by the creation of JFE Holdings Inc. in 2002 because Nippon Steel and Sumitomo Metal have already streamlined some operations through their capital and business alliance, limiting room for consolidation, Nomura’s Matsumoto said.

The merger of Kawasaki Steel Corp. and NKK Corp. to form JFE Holdings resulted in a savings boost of ¥120 billion, or ¥3,900 a ton, according to estimates by Nomura Securities.

JFE has scrapped two blast furnaces, consolidated overlapping facilities and combined group companies. Sales per employee increased 30 percent in the three years to March 2006.

Should the companies decide to close some blast furnaces, savings could be as high as ¥5,000 a ton, or ¥250 billion, said Akira Kishimoto, a Tokyo-based analyst at JP Morgan Securities Asia.

Still, the two may decide not to close blast furnaces to retain them to supply steel for export, said Kazuhiro Harada, a senior analyst at Nikko Cordial Securities Inc.

Japanese steelmakers currently operate domestic blast furnaces at about 90 percent of capacity, up from about 80 percent in 2001. Exports account for more than 40 percent of the total steel output in value terms, offsetting a decline in domestic demand.

Nippon Steel and Sumitomo Metal are planning to establish a production site for steel for use in automobiles in India, as carmakers and electronic appliances manufacturers shift production abroad because of the strengthening yen.