Nippon Steel Corp., Japan’s biggest steel maker, and Sumitomo Metal Industries Ltd., the nation’s third-ranked steel maker, announced Feb. 3 a plan to merge in October 2012. The merger, if it materializes, will bring about the world’s No. 2 steel maker after Luxembourg-based ArcelorMittal, which produces about 10 percent of the world’s crude steel.

The merger follows two major consolidations in Japan’s steel industry — the 1970 merger of Yawata Iron and Steel and Fuji Iron and Steel into Nippon Steel and the 2002 merger of Kawasaki Steel and NKK into JFE Holdings, now Japan’s No. 2 steel maker.

The merger plan represents the two firms’ attempt to survive in the global steel market where Japanese steel makers’ influence has been declining. In terms of global crude steel production, Nippon Steel, once the No. 1, was ranked sixth and JFE ninth in 2009. Nippon Steel and Sumitomo Metal Industries together produce only about 3 percent of global crude steel.

The planned merger will enhance their bargaining power against raw materials producers at a time when iron ore and coking coal prices are rising. Brazil and Australia account for 60 percent of global iron ore exports and three major firms control the world market. Recent coking coal prices are reported to be about 60 percent higher than in the previous year.

It is unrealistic for domestic steel makers to expect demand to expand inside Japan. Nippon and Sumitomo will try to avoid overlapping of investment and decrease production cost. It will be important for them to meet the expanding demand in emerging economies such as China, India, Brazil and Russia, especially demand from the auto industry.

Steel makers from China and South Korea have successfully marketed low-priced, low-to-middle grade steel in Asian markets. Nippon and Sumitomo may consider moving production near such markets. They will have to compete on prices, but they should not forget the importance of developing state-of-the-art products. Such products will be an important weapon in securing a stronghold in crucial markets.

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