Nippon steel tie up will be world’s no. 2

City A.M. Reporter
JAPAN’S Nippon Steel and Sumitomo Metal Industries plan to merge to create the world’s second-largest steelmaker in an effort to fend off tough competition from Asian rivals and offset shrinking demand from domestic automakers.

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

Japanese steelmakers have been particularly hard hit as domestic automakers such as Toyota Motor and Nissan Motor build fewer cars at home and expand in emerging markets using products from local steelmakers.

They also face cutthroat competition from South Korea’s Posco and Baoshan Iron & Steel, China’s biggest listed steelmaker, as Japanese automakers seek lower prices to weather an unfavourably 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.

Nippon Steel, whose main customers include Japanese automakers, 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 last week cut its outlook for the year to March, citing rising costs of coking coal and iron ore.

The merged company would rank No2 in the world, with a combined crude steel output of 47.8m tonnes last year.

Nippon Steel president Shoji Muneoka (pictured) said that he expected the FTC to approve the merger, given that the two firms have different product strengths.