Nippon Steel, Sumitomo Metal Industries

Japan's biggest steelmaker Nippon Steel and third-ranked rival Sumitomo Metal Industries on Thursday announced a merger that will create the world's second-largest steel firm. The tie-up, which they plan to launch officially on October 1, 2012, will create a steel giant second only to India's ArcelorMittal and generate savings in the face of increasingly intense global competition. Through the merger, the steelmakers will aim to realign and strengthen a global network "in response to increasing worldwide demand for steel and the local procurement needs of Japanese steel consumers operating overseas", they said in a statement. They will focus on reorganising and expanding their manufacturing, processing and sales bases in emerging countries, namely China, Brazil, India and Southeast Asian countries. The new company, Nippon Steel & Sumitomo Metal Corp., "will aim to achieve 60 to 70 million tons in terms of global production capacity by further accelerating its overseas business development." Global competition in the steel industry has intensified in recent years with demand spurred by emerging economies such as China that are undertaking massive construction, infrastructure and manufacturing projects. Japanese automakers, electronics makers and other companies have also sought to expand production in foreign markets in search of growth, stronger consumer demand and by way of hedging against foreign exchange risks. "We will aggressively expand our operations overseas," said Nippon Steel president Shoji Muneoka, adding global expansion was vital to a steelmaker's fate in the industry. "By integrating -- personnel, material and financial capacities -- based on the world's top-level technologies, we can carry out our business much more quickly, widely and effectively than we can alone." The merger, under the ratio of 0.735 Nippon Steel shares to one Sumitomo Metal share, would be the first in the Japanese steel industry since the creation of the country's number two firm JFE Holdings around a decade ago. When merger talks were announced in February, industry analysts welcomed the move as a way of helping to stitch together Japan's corporate base. Nicholas Smith, director of equity research with MFGlobal in Tokyo, said the merger was indicative of the growing need for steelmakers to gain leverage as prices for coal, iron ore and other raw materials of steel touch record levels. "Increased scale will make them stronger in negotiating with raw material suppliers -- the rapid run-up in material prices had really hammered profitability," said Smith. "The merger will give Nippon Steel the scale to consider acquisitions of raw material suppliers, like the Chinese steelmakers have done," he said, noting Chinese crude steel production has more than quadrupled in the last 10 years. Profits in Japan's steel industry were badly dented by the March 11 earthquake and tsunami, which battered a key manufacturing region and crimped demand -- especially in the key auto sector -- amid power shortages caused by the disaster at the Fukushima nuclear plant. In July, Nippon Steel announced a first-quarter net profit of 29.09 billion yen, 8.4 percent higher than the same time a year earlier, but attributed it to a lower tax burden. At the same time, JFE said its net profit was down 75 percent year on year to 7.12 billion yen ($91.4 million) for the quarter. Iron ore and coking coal, the two main raw materials for steel production, have seen significant price rises in recent years in a market dominated by the three global mining giants, Anglo-Australian firms BHP Billiton and Rio Tinto, and Brazil's Vale. Nippon Steel was downgraded by both Moody's and Standard & Poor's in June amid concerns over its profitability in the face of rising commodity prices. The Tokyo-based company produces high-quality steel for use in a variety of sectors globally, with the auto industry a key customer.