Japan's steel industry will set off a merger boom

Japan’s two large steel companies, Nippon Steel and Sumitomo Metal Industries, which are the 1st and the third largest in Japan, announced that they plan to complete the merger by October 2012. The combined new company's annual output of approximately 48 million tons of steel will become the second largest steel company in the world, second only to the European Luxembourg company, ArcelorMittal.

As the merger of the two companies is a large-scale merger of the steel industry in the past 10 years, it will certainly change the pattern of the domestic steel industry in Japan. In order to deal with the shrinking domestic market and fierce market competition abroad, it is not ruled out that other steel companies will recombine their portfolios. The Japanese steel industry may set off a new wave of consolidation.

In the absence of any signs, the merger of Japan's Nippon Steel Corporation and Sumikin Corporation has a profound background and is summarized for three reasons:

First, the Japanese steel company's global ranking continues to decline. In recent years, ArcelorMittal has become the world's largest steel company through mergers and acquisitions. The merger and acquisition of China's steel industry is also very active and its scale continues to expand. At present, among the world’s top ten steel companies, China holds three (Hebei Iron and Steel (000709, Shares) Group, Baosteel Group, and Wuhan Iron and Steel Group), ranked No. 2, 3, and 4 with an annual output exceeding 30 million tons. The Nippon Steel Corporation, which has been the leader of global steelmakers for decades, has already dropped to sixth place in crude steel production in 2009.

The second is the pressure to continue rising raw material prices. With coal, iron ore and other steel raw materials prices hitting new highs, especially Rio Tinto, BHP Billiton and Vale's three iron ore products account for 70% of the international market, the price negotiation ability is very strong, coupled with emerging countries on iron ore The increasing demand for rock has increased the pressure on the rise in iron ore prices. For Japanese steel companies whose raw materials mainly depend on imports, the pressure on them can be imagined.

Third, fierce competition from steel companies in emerging countries has forced Japanese steel companies to accelerate their mergers. As the domestic steel market has narrowed, the Nippon Steel Corporation, once ranked first in the world, was surpassed by South Korea’s Pohang Steel in 1998 and fell to No. 3 position in 2006 and No. 6 in 2009, while China’s Baosteel Group has since 2006. The 6th jumped to No. 3, indicating that steel companies in emerging countries are developing very rapidly and Japanese companies are facing increasingly fierce international market competition.

Therefore, Nippon Steel and Sumitomo Metal believe that only the road to the merger will have a foothold. By reorganizing both domestic and foreign production bases, it is possible to establish a global production and sales network, reduce duplication of investment and increase efficiency. It can actively respond to the growing demand in markets such as China and India.

The combined steel output of the two companies accounts for about 40% of Japan's domestic production, and they need to be reviewed and approved by the Fair Trade Commission. Whether or not they can get through will become the focus of the future. Regarding the merger of Nippon Steel and Sumitomo Metal Industries, the Japanese government gave a positive evaluation and welcomed it. The Ministry of Foreign Affairs and Industry of Japan confirmed the submission of the “Amendment to the Industrial Vitality Recycling Act” to the Congress to promote the rapid review and facilitation of business combinations, and The bill can also effectively reduce the tax burden on corporate restructuring. The merger of Nippon Steel and Sumitomo Gold may become the first beneficiary of the bill.