Nippon Steel to buy Nisshin Steel to gird against fallout from China slump

2 February 2016

Japan’s biggest steel maker, Nippon Steel & Sumitomo Metal Corp., said Monday it will buy rival Nisshin Steel Co. in an attempt to withstand deteriorating conditions in the industry triggered by China’s economic slowdown.

Nippon Steel, which already owns around 8 percent of Nisshin Steel, the fourth-largest player in the domestic market, plans to increase its stake to somewhere between 51 percent and 66 percent, turning Nisshin Steel into a subsidiary around March 2017.

The two firms have booked more than ¥6 trillion ($49.5 billion) in combined sales.

Nippon Steel, the world’s second-largest steel maker by output after ArcelorMittal S.A., did not say how much it will pay for the acquisition.

Nisshin Steel’s shares, however, will remain listed on the Tokyo Stock Exchange even after the transaction.

The deal will consolidate the industry into three major steel makers with blast furnaces — Nippon Steel, JFE Holdings Inc. and Kobe Steel Ltd.

Nippon Steel President Kosei Shindo told a news conference that the business environment facing the steel industry was “extremely severe” due to excessive production capacity in Asia and the stalling Chinese economy.

“By bringing together the management resources of both companies and enhancing competitiveness by creating a synergy effect, we will strengthen our position as the best steel maker with the world’s leading capabilities with the addition of Nisshin Steel,” he said. “When we think about the future and how we are going to do (business), now is the best timing,” Nisshin Steel President Toshinori Miki said at the joint news conference.

To streamline its business, Nisshin Steel is considering closing its blast furnaces built in 1962 at its plant in Kure, Hiroshima Prefecture, sources close to the matter said.

Nippon Steel considered increasing its investment in Nisshin Steel in 2009, but the move did not materialize amid fears their combined share of the stainless-steel market could breach fair competition rules. Regulators might look into the upcoming consolidation plan as well, the sources said.

The acquisition is a step to survive intensifying global competition that has forced steel makers to cut costs amid falling prices, as well as shrinking demand following downturns in China and other emerging economies, the sources said.

Nippon Steel & Sumitomo Metal was created through a merger in 2012 between Nippon Steel Corp. and Sumitomo Metal Industries Ltd.

The global steel industry is in crisis because of a glut spurred by the Chinese slowdown, which has boosted competition, dragged prices lower and crushed profit margins.

The sector is in a worrying state, according to Germany’s largest mill, Thyssenkrupp AG.

Last week, JFE Holdings Inc., the No. 2 producer, cut its full-year profit forecast for the second time in three months, and South Korea’s Posco reported its smallest annual profit ever.

“Low price levels will continue for a while,” Nippon Steel’s Executive Vice President Katsuhiko Ota said at a briefing in Tokyo. “We intend to do whatever is necessary.”

He added that prices probably won’t keep dropping, although a V-shaped recovery is unlikely.