Consolidation Pressure on Japan Electric Furnace Steels

Japanese electric furnace carbon steel makers would keep loss making operation when they start new fiscal year in April as fiscal 2010. They are estimated to lose 10,000 yen per tonne when the shipping price is only less than 60,000 yen for concrete reinforcing steel bar and less than 70,000 yen for H-beam while the ferrous scrap cost is around 40,000 yen. An official of major maker said the makers should post loss for the first half of fiscal 2011 starting April. They are also realizing the only way to improve the loss making structure is to consolidate the companies.

The makers’ production cost is estimated to be 30,000-35,000 yen per tonne for rebar and 40,000-45,000 yen for H-beam when the operation rate is vey low. With around 40,000 yen of scrap cost, they have to sell the product at 70,000 yen or more for rebar and 80,000 yen or more for H-beam to make money while their shipping price is well under the level.

The situation is critical for the makers to survive. Recurring profit of listed 13 makers was only total 1.9 billion yen for October-December. The number is expected to turn into red ink for January-March. They try to increase the selling price aggressively but the averaged shipping price would take time to increase the level for them to make money.

Slow demand also impacts on their profitability. Japanese demand is expected to be 7.7-7.8 million tonnes for rebar and 2.7 million tonnes for H-beam in fiscal 2011 starting April, which is slightly less than fiscal 2010 level.

The only way to improve the profitability is to increase the selling price when they cannot increase the sales volume. The industry interests started to recognize they have not choice but consolidation to improve the situation.

Japanese thirty makers have 32 plants to make rebar and 8 makers have 13 plants to make H-beam. The consolidation is difficult when they include affiliate companies of integrated steel makers and trading companies and independent companies. However, the consolidation could occur stimulated by merger of Nippon Steel and Sumitomo Metal Industries. The electric furnace steel makers have to improve the efficiency to survive under sever international competition.