TOKYO (Reuters) - Nippon Steel & Sumitomo Metal Corp (5401.T) says it is on track to meet a target of shedding 300 billion yen (1.88 billion pounds) of unwanted assets in the current business year, 18 months ahead of schedule.
Despite a glum Asian steel market, the company is upbeat about the impact of Japan’s “Abenomics” stimulus programme and expects to benefit from the awarding of the 2020 Olympics to Tokyo, Chairman and Chief Executive Officer Shoji Muneoka said.
Prime Minister Shinzo Abe’s push to fix the world’s third-biggest economy with his mix of hyper-easy monetary policy, fiscal spending and a growth strategy has “significantly” helped improve the business environment, Muneoka told reporters.
Nippon Steel merged with smaller peer Sumitomo Metal Industries last October after they had suffered several years of sliding profits, hit by a strong yen and competition from fast-growing and lower-cost Asian rivals such as POSCO (005490.KS).
“Thanks to several reasons including Abenomics, we’ve had a better-than-expected first year,” Muneoka said. Tokyo’s Olympic success had also brightened the outlook for construction demand and improved overall business confidence, he added.
Under its three-year business plan unveiled in March, Nippon Steel aims to cut annual costs by 200 billion yen ($2.04 billion) from merger synergies by 2015/16 and raise its pre-tax profit ratio to 5-10 percent from a mere 1.8 percent in 2012/13.
“We want to meet our targets ahead of schedule. For example, we aim to achieve our target to cut assets by 300 billion yen this business year,” Muneoka said.
He said cumulative reductions in inventories and disposals of shares in other companies already totalled 220 billion yen by end-September. The original target to cut assets by 300 billion yen was set for the middle of the 2015/16 year, three years after the merger.
The Tokyo-based steelmaker expects a nearly four-fold rise in profit in the current business year to next March as it bets aggressive cost-cutting, stronger local demand and higher profit margins from its exports will outweigh market gloom caused by China’s massive crude steel output and its softer economy.
Backed by the solid earnings outlook, its share price has more than doubled since the merger, boosting its market capitalisation to over $34 billion (20 billion pounds), the highest in the steelmaking sector, beyond POSCO’s $26 billion and ArcelorMittal’s ISPA.AS $23 billion.
Some investors are still bullish.
“Due to the yen’s plunge, Abenomics, larger fiscal spending to refresh old infrastructure among other things, Japanese steel makers will enjoy the Japan-only steel boom for a while,” said Masayuki Kubota, senior fund manager at Daiwa SB Investments Ltd.
“Most overseas steelmakers are suffering from oversupply, but Japanese makers are regaining competitive edge thanks to the weaker yen and their focus on high-end products which cannot be supplied by most other rivals.”
Despite rising local demand for steel, Nippon Steel will not increase steel output capacity in Japan, Muneoka said. “Any increase will come from our overseas bases,” he said.
The company has been stepping up global expansion, mainly through building new local plants to supply high-end automotive steel products to Japanese automakers. Nippon Steel’s overseas production capacity will rise by 50 percent this year to 14 million tonnes, Muneoka said.
Japan’s top steelmaker will consider adding facilities in North America, Indonesia and India, areas where Japanese automakers are accelerating their production. But it is not in hurry to build a blast furnace, he said.
“We still want our own blast furnace in ASEAN. But the oversupply problem in Asia may last for another 10 years and we need to be prepared to survive and improve our competitiveness,” the 67-year-old CEO said. “We don’t need to rush”.
Rival POSCO, by contrast, is keen on overseas expansion through building bigger steel mills outside its domestic South Korean market where it generates nearly 60 percent of its sales volume and is losing share to smaller rival Hyundai Steel Co (004020.KS), backed by automaker Hyundai Motor Co (005380.KS).
POSCO plans to start production at its 3-million tonne steel mill in Indonesia by the end of this year, while in Brazil, the steelmaker is partnering with Vale SA (VALE5.SA) and Dongkuk Steel Mill Co Ltd (001230.KS) for a 3-million-tonne mill to produce slabs starting 2015.
“I don’t envy what POSCO is doing,” Muneoka said.
“We do want to increase sales and output of our-brand products to 60-70 million tonnes in the future, but we are not just seeking larger scale. We want to beat our rivals in terms of ability to offer high-quality products which our customers want.”
Reporting by Yuka Obayashi; Editing by Mark Trevelyan