Skip to main content

Japan's Nippon Steel Corp. and Sumitomo Metal Industries plan to merge to create the world's second-largest steel maker in an effort to fend off tough competition from Asian rivals and offset shrinking demand from domestic auto makers.

The deal, which would likely see Japan's top steel maker Nippon Steel acquiring Sumitomo Metal, comes as the industry grapples with surging raw materials prices, exacerbated recently by floods in Australia.

Japanese steel makers have been particularly hard hit as domestic auto makers such as Toyota Motor Corp. and Nissan Motor Co. build fewer cars at home and expand in emerging markets such as India using products from local steel makers.

They also face cut-throat competition from South Korea's POSCO and Baoshan Iron & Steel Co. , China's biggest listed steel maker, as Japanese auto makers seek lower prices to weather an unfavorably strong yen.

Analysts, as well as Japanese government officials and politicians, welcomed the plans for the merger, which is subject to approval from Japan's Fair Trade Commission (FTC).

"The new group has a chance to become very competitive in Asia," said CLSA analyst Jeremie Capron, adding there was room for Sumitomo Metal to cut costs with the help of Nippon Steel.

"The merged company will have the best product line-up in the industry ranging from construction steel, auto steel sheets, thick plates to seamless pipes. That's quite unique, and the No. 1 company, ArcelorMittal , does not have such a product line-up."

Nippon Steel, whose main customers include Japanese auto makers, and Sumitomo Metal Industries, which is strong in seamless pipes used in the energy, construction and machinery sectors, said they aimed to merge in October 2012.

Nippon Steel and Japan's No. 2 JFE Holdings last week cuts their outlooks for the year to March, citing rising costs of coking coal and iron ore.

Nippon Steel executives had said the company was looking to deepen co-operation with Sumitomo Metal and Kobe Steel Ltd , with which it has some operational partnerships, but had cited objection from the FTC for its inability to do so.

The merged company would rank No. 2 in the world, with a combined crude steel output of 47.8 million tonnes last year, Sumitomo Metal Industries President Hiroshi Tomono said at a news conference in Tokyo. It will employ more than 75,000 people.

That would still be about half the production of top-ranked ArcelorMittal but place the group ahead of Baosteel. Based on 2009 crude steel production, Nippon Steel ranked fourth in the world and Sumitomo Metal placed 19th, according to the World Steel Association.

"These are two industry goliaths. The merger of these two titans of industry looks designed to exceed anything the Chinese can do," said John Meyer, a London-based analyst at investment bank Fairfax.

"The integration...combines the production and technical skills of both companies to produce better-quality products more efficiently and more effectively. Other steel producers will struggle to compete with the new efficiencies of scale and services being offered by the joining of these titans," he added.

Nippon Steel, with a market capitalization $24-billion, and Sumitomo Metal, valued at $11-billion, already hold minority stakes in each other.

They have not yet decided the merger ratio.

Nippon Steel president Shoji Muneoka told a news conference that he expected the FTC to approve the merger, given that the two firms have different product strengths.

Muneoka also said the relationship with Kobe Steel, in which Nippon Steel holds a stake of 3.4 per cent, would be maintained.

Rival JFE said it supported the merger and Japanese Trade Minister Banri Kaieda said it had his blessing.

"The merger aims to strengthen global competitiveness through reorganizations of operations as global competition heats up in the steel industry," he said.

"I value such a move highly because it is line with our 'new growth strategy' aimed at realizing a strong economy."

JFE unit JFE Steel was the last major merger in the Japanese steel industry, when Kawasaki Steel and NKK combined in 2002 to form what is now the world's fifth biggest steel maker.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 7:00pm EDT.

SymbolName% changeLast
MT-N
Arcelormittal ADR
-0.83%27.58
PKX-N
Posco Holdings Inc ADR
-1.59%78.42
TM-N
Toyota Motor Corp Ltd Ord ADR
-0.19%251.68

Interact with The Globe