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NKK Corp., Japan’s second-largest steelmaker, and Kawasaki Steel Corp., No. 3 in the field, announced Friday that they have agreed to integrate their operations in October 2002 under a joint holding company.

The two steelmakers will then realign themselves into several firms in April 2003 under the holding company, they said.

The combined annual crude steel production would total 32 million tons, exceeding the output of Japan’s top steelmaker, Nippon Steel Corp.

The NKK-Kawasaki deal is the first integration between major steelmakers since the creation in 1970 of Nippon Steel through the merger of Yawata and Fuji iron and steel companies.

Corporate realignment in the European steel industry is also progressing, with Usinor SA of France, Europe’s largest steelmaker, in February announcing plan to merge with steelmakers in Luxembourg and Spain to create the world’s largest steelmaker.

In Japan, Nippon Steel and Sumitomo Metal Industries Ltd. have already tied up in the stainless steel business.

The agreement between NKK and Kawasaki Steel will undoubtedly result in further realignment among Japanese steelmakers, analysts said.

At a news conference, NKK President Yoichi Shimogaichi said, “We sought an early integration amid developments in the ongoing globalization of the steel market.”

Kawasaki Steel President Kanji Emoto said negotiations by the two companies to tie up with foreign steelmakers will make the integrated firm strong enough to compete with Nippon Steel.

The two companies said they expect the integration to reduce research and development spending as well as management costs.

They also said they will consider workforce reductions and the integration of their production bases and facilities.

The two steelmakers said the alliance also reflects recent falls in steel prices, particularly in Asian nations.

Analysts pointed out, meanwhile, that the two steelmakers will have to absorb a total of 2.6 trillion yen in interest-bearing liabilities before they can be considered one of the world’s top steelmakers, as competition to reduce costs in the steel industry has intensified.

Both are suffering under the weight of excessive production facilities, and analysts say that in order to trim costs the alliance will have to reduce research and development spending and integrate production bases.

NKK was established in 1912, and employs about 11,100 people. Its consolidated sales for fiscal 1999 reached 1.685 trillion yen, but it suffered a group net loss of 45.9 billion yen for the year ending in March 2000.

Kawasaki Steel, created in 1950, was originally the steel division of Kawasaki Heavy Industries Ltd. It chalked up 1.257 trillion yen in consolidated sales for fiscal 1999 while its group net profit for this term came to 12.4 billion yen. It has about 10,000 employees.

While they have already tied up in three fields, including distribution, the difference in their stock prices has gradually declined, leading the two companies to agree to integrate operations.

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