Steel industry braces for slow recovery from crisis

A full recovery from the worst ever crisis for the global steel industry may take as long as five years, says the head of Japan’s second-largest steelmaker, who is predicting an acceleration in industry-wide consolidation.

Eiji Hayashida, chief executive of JFE Holdings, said market conditions are expected to improve after China started to shut down steel factories to address excess industrial capacity.

But he said it was premature to assume a recent short-term rise in Chinese steel prices would lead to an immediate recovery in global demand. Chinese mills have been accused of compounding sluggish demand by dumping surplus steel on to international markets.

“I think what we are seeing now is the bottom and things will not get worse,” Mr Hayashida said in an interview. “But the problem (in China) cannot be resolved in one to two years. It will take three to five years for the situation to considerably improve.”

A global glut made steel cheaper last year than at any other point in the past decade, weighing heavily on earnings at other big producers such as ArcelorMittal, US Steel and South Korea’s Posco.

In Japan, the world’s second-biggest producer of steel, a focus on higher-value steel in smaller volumes has helped shield companies such as JFE Holdings from an influx of typically lower-grade and commoditised steel from emerging markets.

Yet even Japanese players are still under pressure. Kobe Steel — which makes Kobelco cranes and diggers as well as metals — is anticipating an annual net loss of Y20bn ($176m) while JFE Holdings halved its net profit forecast to Y25bn for the fiscal year ending in March.

Last month, Japan’s biggest steelmaker, Nippon Steel & Sumitomo Metal, said it would buy domestic stainless steel producer Nisshin Steel as it seeks scale to weather the global downturn.

“What we are seeing today is probably close to the worst-ever crisis for the steel industry,” Mr Hayashida said, comparing the current situation to the global slump in the wake of the Asian economic crisis in the late 1990s.

What differentiates 2016 from 15 years ago is the focus on higher-value products, which include high-strength steels used in automotive industries, deeper cost-cutting efforts and a stronger balance sheet. Mr Hayashida said such improvements have allowed the company to step up spending to renew ageing facilities despite a deterioration in earnings.

With the Japanese steel industry now consolidated to three major players, Mr Hayashida said he wants to seek investments and technology alliances with global players. Despite the recent downturn, JFE Holdings is counting on growth in other parts of Asia and emerging markets to drive demand for steel used in cars and infrastructure.

“We expect an acceleration in industry-wide realignment and mergers. We are not ruling anything out,” he added.

The company already has a high proportion of exports to South Korea, China and Thailand. In 2010, JFE Holdings acquired a 15 per cent stake in India’s JSW Steel to gain a foothold in one of the world’s fastest growing automobile markets.