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Steel makers up cost-cutting as demand tails off

JIJI

Major Japanese steel makers are stepping up their cost-cutting, amid stalled growth in domestic demand and intensifying international competition.

Nippon Steel & Sumitomo Metal Corp. plans to close one of the three blast furnaces at its ironworks in Kimitsu, Chiba Prefecture, by fiscal 2015. Kobe Steel Ltd. will stop operating the sole blast furnace at its plant in Kobe in fiscal 2017.

The two steel makers are drastically restructuring their manufacturing operations for the first time since 1993 and 1987, respectively.

As manufacturers of automobiles and electrical equipment are increasing their production overseas, domestic demand for steel products is unlikely to grow. Cost reductions and streamlining of production have become unavoidable for the survival of steel makers.

In fiscal 2012, demand for steel products in Japan fell to 61 million tons, from 79 million in 2007.

“With the population falling and rising overseas production by automakers and other users, domestic steel demand will drop below 55 million tons in 2020,” Kobe Steel President Hiroya Kawasaki predicted.

Kobe Steel estimates annual cost savings of more than ¥15 billion from the closure of a blast furnace.

But rationalization of production could have adverse affects on local economies, such as reduction of jobs and fixed-asset tax revenues.

Increased competition with Chinese and South Korean steel makers is also forcing Japanese manufacturers to accelerate their cost cuts.

According to the World Steel Association, world production of crude steel stood at 1.547 billion tons in 2012, up 1.2 percent from the previous year. Chinese makers accounted for 46 percent of the total.

Due to the rising production of Chinese manufacturers, East Asia faces a glut of steel products. Japanese steel makers have been forced to cut their prices by 20 percent to 30 percent from fiscal 2008 levels.

With Chinese steel makers producing at an annual rate of more than 800 million tons, the gap between supply and demand has expanded to a “very alarming” degree, warned Hiroshi Tomono, president of Nippon Steel & Sumitomo Metal.

Industry officials say that Chinese and South Korean steel makers plan to begin operating new ironworks around 2015 and the glut of steel products is expected to expand to a level that could shake the management of leading Japanese manufacturers.

Rising import prices for iron ore and coal, caused by the depreciation of the yen, are also eating into earnings at Japanese steel makers. Raw material costs account for 50 percent to 60 percent of manufacturing costs.

At Nippon Steel & Sumitomo, founded in October 2012 through the merger of Nippon Steel Corp. and Sumitomo Metal Industries Ltd., former Sumitomo Metal plants will follow those that belonged to Nippon Steel and introduce a production technology that uses inexpensive and low-quality coal.

JFE Steel Corp., Japan’s other top three steel maker, plans to build a new manufacturing facility at its plant in Fukuyama, Hiroshima Prefecture, aiming to drastically reduce the use of coal and other raw materials in the smelting process.