Japan consolidates against global overcapacity

Japan consolidates against global overcapacity

The effects of weak demand in Japan on top of the competition with Asian producers continue forcing the Japanese steel makers into alliances, looking for cost reducing solutions via such synergies. The merger of Kawasaki Steel Corp. and NKK Corp. to form JFE holdings Inc., earlier this year, initiated such collaborations in the nation. As a a major move for further consolidation in Japanese steel industry, Nippon Steel Corp. Sumitomo Metal Industries Ltd. and Kobe Steel of Japan announced capital tie-up on November 14, 2002 by signing bilateral agreements each with the other two companies, concerning bipartite colloaboration measures and cross share holding, earlier this month. Nippon Steel and Kobe Steel will invest Yen 3 billion in each other, as Kobe Steel and Sumitomo will do, in order to strengthen ties between the three firms. Furthermore, Nippon Steel and Sumitomo metals will take stakes in each other worth Yen 5 billion ($41 million). Closing down the hot strip mill and one cold strip mill at its Wakayama plant of 3.4 million crude steel annual capacity is also included in Sumitomo Metal's plans by March 2005, in favour of purchasing these products from its two partners. The slab production at Wakayama plant of Sumitomo is expected to continue after the deal with China Steel Corp. (CSC) increasing its slab purchases from 600'000 tons to 1.8 million tons per year. With such collaboration, the three companies are aiming to increase bussiness efficiency while countering the JFE Holdings Inc. To take this improvement further, the three companies are planning to establish a Joint Study Commiteee in order to study the items such as raw material procurement and product distribution in this respect. As a merger between the three companies would not be practical, the easiest and most convenient solution was to exchange shares and form a corporate linkage through plant rationalisation in order to ease the global oversupply problem via cost reduction and at the same time counter the threat of JFE created by the merger of Kawasaki and NKK, to be completed by the beginning of financial year 2003. The steel industry has been suffering this overcapacity problem for many years now. Steelmakers looked for solutions by increasing the production, while keeping the labour force level or reducing it, making new investments in larger plants. The fact that it would generate lower revenues over which to distribute the fixed costs held the option of cutting down production out. Therefore mergers and acquisitions were commonly preferred, especially in Europe. Turning the competitors into allies by cooperating mainly in purchasing and distribution businesses started to be to the companies' benefit. This kind of collaboration originated in Japan now is seen as a new way of consolidation, contributing to cope with the global overcapacity problem, even though it may not be enough to solve the problem radically.