Nippon Steel & Sumitomo eyes more cost cuts as debuts in weak market

TOKYO Sun Sep 30, 2012 6:11pm BST

Nippon Steel Corp. President Shoji Muneoka (L) shakes hands with Sumitomo Metal Industries President Hiroshi Tomono at their joint news conference in Tokyo February 3, 2011. REUTERS/Kim Kyung-Hoon

Nippon Steel Corp. President Shoji Muneoka (L) shakes hands with Sumitomo Metal Industries President Hiroshi Tomono at their joint news conference in Tokyo February 3, 2011.

Credit: Reuters/Kim Kyung-Hoon

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TOKYO (Reuters) - The head of Nippon Steel & Sumitomo Metal Corp (5401.T) said the newly merged company forming the world's second-biggest steelmaker will embark on further cost cutting in a bid to counter a slump in the price of the metal.

The $22.45 billion (13.8 billion pounds) merger was forged last year after both companies had suffered several years of sliding profits, the result of a strong yen and competition from Asia's fast-growing and lower-cost rivals.

As the merged entity debuts Monday on Tokyo's stock exchange, Chief Executive Shoji Muneoka said the company will come up with new cost cutting measures by March on top of a previously announced target of stripping out 150 billion yen in annual costs by 2015.

"The market outlook is uncertain due to a large demand-and-supply gap in Asia," Muneoka told a small group of reporters on September 24. The release of his comments was embargoed until October 1.

"But we'll survive if we have a cost edge," he said.

Nippon Steel & Sumitomo is not alone in feeling the pinch from the slide in steel prices that has tracked the slowdown in China's economic growth and pullback in European demand.

China's biggest-listed steelmaker Baosteel (600019.SS) said last week it had suspended output at a 3 million tonne-a-year plant in one of the first public announcements of a shutdown by a major mill in the world's biggest market for the metal.

Producers in Germany, the European Union's biggest steelmaker, have cut crude steel output by 5 percent so far this year compared with a year earlier, the country's steel industry association said in September.

Muneoka estimated producers would have to idle 500 million tonnes of steelmaking capacity to match global demand, which he put at 1.5 billion tonnes a year. China accounts for 200 million tonnes of the surplus capacity, he said.

Nippon Steel & Sumitomo has steelmaking capacity of 50 million tonnes a year, second only to ArcelorMittal (ISPA.AS), which produced more than 97 million tonnes of crude steel in calendar 2011.

It plans to boost that to as much as 70 million tonnes a year by expanding in emerging markets, particularly in Asia.

But for now Muneoka said the focus was on cutting costs by streamlining the downstream capacity of the merged company mainly in Japan.

He said the firm aimed to maintain upstream crude steel capacity in Japan of around 50 million tonnes a year -- now running at nearly 90 percent of capacity thanks to steady export volumes.

Nippon Steel & Sumitomo's 16 Japanese-based mills are scattered throughout Japan, adding to costs. In contrast, South Korea rival POSCO (005490.KS), the world's fourth biggest steelmaker, has its production capacity on just two sites.

That helps explain Nippon Steel & Sumitomo's push for further cost cuts, said Yuji Matsumoto, an analyst at Nomura Securities.

"Because a gap in production cost between Nippon Steel and POSCO is large, the planned 150 billion yen cost cut isn't enough," Matsumoto said.

The company aims to outline its consolidation plans for Japan in December and provide details by March, Muneoka said.

Muneoka didn't mention job cuts, but in September 2011 the company said it had no intention of laying off workers.

WEAK FINANCIAL HEALTH

Core profits at Nippon Steel and Sumitomo Metal fell rapidly after the Lehman collapse sparked the global financial crisis as a rally in the yen squeezed their competitive edge. Since the crisis, investors have used the yen as a safe haven.

That pushed down the combined firm's operating profit-to-sales ratio to 2.8 percent for the year to March 2012. That compared with 10.7 percent for POSCO and 4 percent for Baosteel in the year to March 2011, Reuters data shows.

While steel prices are still in a downtrend, the cost of steelmaking raw materials like iron ore and coal have resumed rising again, Muneoka said, suggesting further cost pressures.

"We expect it to stay at a plateau (high level)," Muneoka said, referring to raw materials prices.

Beijing's approval of more than $150 billion budget for infrastructure projects and easier monetary policy in Japan, the United States and Europe pushed up prices of ore .IO62-CNI=SI in the first half of September. But at $104.20 a tonne, iron ore is still down 25 percent this year.

The merged company expects a pre-tax recurring profit of 20 billion yen on revenue of 2.67 trillion yen for the April-September first-half.

The two firms took a combined impairment loss against loss-making domestic assets of 240 billion yen ($3 billion) for the first half.

Muneoka said the merger will allow Nippon Steel to shift more money and manpower to overseas projects, particularly to Asia, where he sees infrastructure spending spurring demand.

The company will start producing high-end automotive steel sheets in India, Mexico and Thailand in 2013, in addition to the production in Brazil, the United States, China and Europe.

Its recent acquisition of a 50 percent stake in Australia's Bluescope Steel (BSL.AX) gives Nippon Steel access to Asia's construction steel market, Muneoka said.

(Editing by Neil Fullick)

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