Steel mill construction booming in Asia / Chinese, S. Korean operations likely to hurt Japan firms due to oversupply, falling prices

Hironari Akiyama and Mamoru Kurihara / Yomiuri Shimbun Staff Writers

Chinese and South Korean steelmakers will begin operations at large-scale steel mills throughout Asia from 2013, possibly causing a huge oversupply that--combined with falling steel prices and high costs for raw materials--could hurt Japanese steelmakers.

In South Korea, Hyundai Steel Co., the country's second-largest steelmaker, will complete construction on a third blast furnace this September at its steel mill in Dangjin, a city in the country's midwest.

Hyundai Steel will add 4 million tons in crude steel output capacity per annum for a domestic total of 24 million tons.

In China, the steel mill construction boom will continue mainly in southern coastal regions.

In May 2012, Wuhan Iron and Steel (Group) Corp., the world's No. 6 steelmaker, began constructing a huge steel mill with an annual output capacity of 10 million tons in Fangcheng, a city in Guangxi Zhuang Autonomous Region.

China's Baosteel Group Corp., the world's fourth-largest steelmaker, began constructing a similar-scale mill last spring in neighboring Guangdong Province.

A total of 130 billion yuan (about 1.8 trillion yen) has been invested in such projects.

"The Chinese central government has approved [the projects] to boost the economy," said an executive at a major Japanese-affiliated steelmaker.

In Southeast Asia, South Korea's POSCO, the world's No. 5 steelmaker, along with major Chinese steelmakers that have partnerships with local companies plan to build steel mills in at least five locations. The steel mills will have output capacities ranging from 3 million tons to 20 million tons each.

Some economists believe that in a few years, the output capacity of steel in Asia will increase by about 100 million tons, which is about 10 percent of the current total.

As Asian facilities already produce an excess of 200 million tons, market conditions will inevitably worsen.

In Japan, crude steel output has remained almost flat for the past 40 years at about 100 million tons a year.

China accounts for nearly 50 percent of global steel demand. However, oversupply has become a serious problem due to the slowdown in the Chinese economy.

In 2011, China's steel demand totaled about 600 million tons per year. However, the country's output capacity was about 900 million tons.

Trade experts predict that China will increase pressure on Southeast Asia regarding its steel exports.

The Chinese government has announced it plans to integrate steel mills, mostly small ones, and reduce output. But the production-capping plan has not progressed, partly due to concerns about employment.

"We expect Chinese leaders will exercise their strong leadership [in this matter]," said Hiroshi Tomono, chairman of the Japan Iron and Steel Federation and president of Nippon Steel & Sumitomo Metal Corp.

When faced with similar problems in the 1960s and 1990s, Japanese steelmakers took concerted actions, such as coordinating production cuts, to stabilize domestic steel prices.

But Japanese makers' share of global crude steel output fell to about 7 percent in 2011.

Of the world's top 10 steelmakers, seven were Chinese or South Korean. By contrast, only two Japanese makers--Nippon Steel & Sumitomo Metal (No. 2) and JFE Steel Corp. (No. 9)--made the top 10.

Japanese makers hold the advantage in terms of producing high-quality steel sheets, mainly for automobile manufacturing. However, Chinese and South Korean rivals are improving their technological capabilities.

Additionally, many automobile and home electronics manufacturers--the main clientele for Japanese steelmakers--have moved production bases overseas.

The increasing inflow of lower-priced steel products from overseas has also toughened management conditions for Japanese steelmakers.

For the period through March 2013, Nippon Steel & Sumitomo Metal forecast it will incur an after-tax loss of hundreds of billions of yen, while Kobe Steel Ltd. has predicted an after-tax loss of 60 billion yen.

To reverse this trend, an industry analyst said, "The four major steelmakers need to reorganize or integrate 27 domestic blast furnaces to rectify their high-cost structures."

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Kurihara is a correspondent in Beijing.