Nippon Steel Faces Long Fight in South America

18 March 2016

Squabbles with a co-investor are frustrating attempts by Nippon Steel & Sumitomo Metal to overhaul operations at flagging Brazilian affiliate Usiminas, foreshadowing a long and painful road to recovery as the outlook for the steel industry darkens.

The Brazilian steelmaker's board on March 11 approved Nippon Steel's proposal of a capital increase of up to 1 billion reais ($274 million), part of a plan to convince banks to keep the company solvent. But Argentine steelmaker Ternium, a fellow Usiminas stakeholder, continues to push a separate recovery plan involving a little over 500 million reais in new capital. That plan is expected to come up for debate at this Friday's board meeting.

"They just want to pay as little as possible," complained one Nippon Steel executive. The Japanese and Argentine companies each hold a slightly less than 30% voting stake in Usiminas. But the two have been on bad terms since 2014, when Nippon Steel supported the removal of the Brazilian company's then-president, a Ternium alumnus accused of compliance violations.

"The banks have demands, too," a Nippon Steel higher-up said, commenting ahead of Friday's board meeting. "Usiminas has already approved the capital increase of 1 billion reais -- this won't be upended."

The capital increase will take the form of a rights offering. If Ternium or other shareholders refuse to buy in, "Brazilian law allows Nippon Steel to take up their portion as well," a representative for the Japanese company said. The Argentine company thus has little choice but to pay up if it hopes to remain on equal footing.

Not so easy

But Usiminas' troubles are far from over, even if the capital raise keeps it from running dry. There is little hope for an earnings recovery as Brazil's economy slumps sharply. The steelmaker ended 2015 with a net loss of 3.68 billion reais, resulting in an equity-method investment loss of nearly 20 billion yen ($179 million) for Nippon Steel for the year ending this month. Usiminas is rushing to streamline its mill operations and otherwise trim costs this year. But restructuring may not be able to keep pace as demand withers.

Usiminas also faces debt repayments on the order of 2 billion reais per year between 2016 and 2018, likely to leave it more strapped than ever. The steelmaker is expected to win deferments and other aid in talks with its lenders. But the company still requires fixing up to the point where it can reliably pay its own bills with core operations.

Nippon Steel and Ternium have agreed to cooperate on running Usiminas until 2031. Even if the Japanese company ends up taking on the full 1 billion reais in offered shares and raises its stake to near 50%, the pact will force it to keep Usiminas as a mere equity-method affiliate. That status quo "is really only a halfway solution," a Nippon Steel official said. "We'd have quite a few more options if we could make it a subsidiary."

Nippon Steel has become more proactive in its business dealings, according to Atsushi Yamaguchi of UBS Securities Japan. The company is in the process of taking over competitor Nisshin Steel, and recently dissolved its strategic partnership with Chubu Steel Plate, demonstrating a shrewd sense of when to take hold and when to let go.


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