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The nation’s stainless steel mills must combine or ally to regain ground lost to rivals in China and South Korea, Nisshin Steel Co.’s chief executive officer said.

“The current size of the operations is too small,” Hideo Suzuki said in an interview at Nisshin Steel’s Tokyo headquarters Wednesday. “The industry will need to consolidate.”

Bigger steelmakers would be in a stronger position to negotiate raw material prices with suppliers and accelerate investments, Suzuki, 65, said.

Companies attempting to unite would either have to overcome regulatory hurdles, including strict antimonopoly rules, or shutter plants and seek manufacturing bases overseas, said Yasuhiro Matsumoto, an analyst at Shinsei Securities Co.

“Mergers and stronger ties will be necessary to boost international competitiveness and maintain their home market,” Matsumoto said. “Regulatory setbacks may hollow out Japan’s steel manufacturing.”

Nisshin Steel, Japan’s third-largest producer of the rust-proof alloy, is seeking to extend an alliance with Nippon Steel Corp., Suzuki said without elaborating.

The Fair Trade Commission had rejected a plan by Nippon Steel, the nation’s biggest producer, to double its stake in Nisshin Steel and sell a 20 percent stake in a stainless steel unit to Nisshin, the Asahi Shimbun reported Feb. 25.

An annual production capacity of at least 2 million metric tons will be needed to compete against international rivals that produce more than 3 million tons, Suzuki said. That’s more than triple Nisshin Steel’s production in the last financial year and almost double the level of Nippon Steel & Sumikin Stainless Steel Corp.

China’s Taiyuan Iron & Steel Group Co. is the world’s largest maker of stainless steel by 2009 output, followed by South Korea’s Posco, Taiwan’s Yieh United Steel Corp. and Germany’s ThyssenKrupp AG, according to the website of Chinese researcher Mysteel.com.

Nisshin Steel, 10 percent owned by Nippon Steel, produced 540,000 tons of crude steel to make stainless steel products in the year ending March 31. Unit Nippon Steel & Sumikin shipped 758,000 tons of stainless steel in the year.

China’s stainless-steel production may rise 13 percent to 11 million tons this year, according to Beijing Antaike Information Development Co., a state-owned metals and mining research company, based in the capital.

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