Posted on 06 Mar 2020
JFE Holdings Inc., Japan’s second-biggest steelmaker, is reassessing production at its aging facilities at home as domestic demand shrinks and competition intensifies overseas.
In contrast to faster growing markets such as China and India, demand in Japan is set to fall over the next 10 to 20 years as the population shrinks, Chief Financial Officer Masashi Terahata said in an interview earlier this week. The company also faces stiffer competition in Southeast Asia, its top export market, as rival mills, especially from China, step up sales of cheaper steel.
“We must look ahead and make a judgment on the optimal structure of our production facilities for the mid- to long-term,” Terahata said at the company’s headquarters in Tokyo. “We will see a drastic change in the worldwide industrial map if Chinese mills build blast furnaces in Southeast Asia” as it could make Japanese steel less competitive, he said.
JFE is currently trying to estimate the pace of decline in domestic demand over the next couple of decades to determine the appropriate size of its production capacity, Terahata said, adding that the company will unveil its reorganization plans in the year starting April. It also intends to utilize or add more overseas manufacturing sites and move some production from Japan to faster-growing Asian economies to compete against foreign rivals, he said.
JFE currently ships more than 40% of its crude steel outside its home market. The plan to reorganize its facilities comes as margins are being squeezed by high production costs and low steel prices. JFE has forecast zero profit for the full-year at its steel unit, which contributes more than 60% of the company’s total sales.
Japan’s steelmakers were hit particularly hard by a downturn in both domestic and overseas demand, as well as disruptions to production caused by a typhoon last year. Nippon Steel Corp. last month announced a structural reform, including the unprecedented closure of all facilities at its Kure steelworks in southwestern Japan, as it warned it was heading for a record annual loss.
JFE dropped 6% to 901 yen in Tokyo on Friday, the lowest since the company was formed by a merger in 2002. Nippon Steel tumbled 5.8% to the lowest in 40 years, while the Nikkei 225 stock index declined 2.4%.
In 2019, Japanese crude steel output fell 4.8% to 99.3 million tons, the first time in a decade production has fallen below 100 million tons. The figures contrast with a bumper year in China, which increased its crude steel output by 8.3% to a record 996 million tons. Japan is now the third biggest producer after being overtaken by India in 2018.
Coronavirus Concerns
“We have long spent money on renovation and maintenance for aging facilities in Japan, but the issue is we can’t spending the same way,” the executive said. JFE has said it will scale back its proposed 1 trillion yen ($9.3 billion) capital investment budget by 10% over the three years through March 2021.
The outbreak of the coronavirus is also a concern. While JFE has yet to see a major impact, Terahata says the virus will pose two risks. It could sap demand if customers in the manufacturing and construction industries are unable to secure enough parts or materials from China, halting activity. It also raises the risk that China would ship its record stockpiles of steel to other countries at a discount if it’s unable to consume it at home.
In a reflection of the growing turmoil, Japan’s top steel industry group last week urged mills in China to reduce output as demand falls.
Source:Yahoo Finance
