Japan's Kobe Steel plans to turn power operations into a stable profit generator, a strategy aimed at surviving on its own without becoming caught up in an industry realignment.

"Three core business areas -- materials, machinery and electric power -- will be sufficient to keep the company whole" even as rivals merge to survive the current steel slump, President Hiroya Kawasaki told a news conference Tuesday. Kobe Steel released its five-year plan through March 2021 that day. The previous plan aimed for profit growth centered on steel operations. But the new road map downgrades the metal's status, positioning it as just one more material -- a fitting move for one of the earliest players in the materials sector to pursue diversification in earnest.

The iron and steel business is still Kobe Steel's largest segment, bringing in around 40% of group sales. But massive oversupply in China has soured the steel market, apparently putting those operations in the red on a pretax basis for the year ended in March. The steelmaker has decided to shut down its blast furnace at the Kobe Works in 2017, cutting crude steel output by more than 10% to around 7 million tons. Steel operations will become less significant in the company's overall business over time.

The outlook is also bleak for machinery operations, despite the target of more than 40 billion yen ($361 million) in pretax profit in fiscal 2020. China's economic deceleration has put the construction machinery segment in the red, leaving the company -- whose steelmaking business is just "a rounding error, in terms of the global" steel industry, Kawasaki admits -- in a precarious position.

New power source

It is up to electric power, the third pillar of Kobe Steel's plan, to ensure the company's survival. Because the power industry is built on long-term contracts with domestic customers, it tends to be less affected by the global market than the materials and machinery sectors, making it a highly reliable revenue source.

Power stations in Tochigi Prefecture and at the site now housing the Kobe blast furnace are set to come online in fiscal 2019 and fiscal 2022 respectively, supplementing production at Kobe Steel's current power generators in Kobe. Once those stations are up and running, the power segment is seen yielding profit on the order of 40 billion yen to 50 billion yen per year -- more than is forecast for the steel segment in fiscal 2020. The company will then "use electric power as a solid base from which to develop the materials and machinery businesses," Kawasaki said.

Earnings from power operations will be reinvested in materials operations, part of efforts to develop specialty fields that can beat competitors even as steel operations shrink. Kobe Steel will put 100 billion yen into producing lightweight automobile materials over the next five years, Kawasaki indicated.

The company will target fields that larger competitors have not yet tapped, such as materials fusing aluminum with high-tensile steel, which Kobe Steel aims to start selling to automakers and others as early as 2021. Operations in areas such as construction materials where major manufacturers can draw advantages from mass production, meanwhile, will be cut back.

Still, operations centered on electric power will bring challenges of their own. Planned power plants are seen bringing stable earnings. But competition with new producers rushing into the industry in light of Japan's recent deregulation in the retail power market could hinder expansion. Getting its other operations going again while the power market is hot will be the key to Kobe Steel's success.

 

Source : nikkei.com

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