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Japanese collaboration may be the pattern for future collaboration
November 2002
Has the Japanese steel sector discovered a third way of restructuring to assist in easing the global oversupply problem? If mergers and acquisitions are too difficult to make, perhaps corporate linkage through plant rationalisation and an exchange of shares could help.
Nippon Steel, Sumitomo Metal Industries and Kobe Steel announced, on 14 November, a series of agreements to increase co-operation and to take up a holding in the other party's equity. A merger between the three organisations would not have been practical because the combined entity would have had a major share of the market for a number of key products and have fallen foul of anti-trust laws. They, therefore, had to look for other ways of reducing costs to counter the threat from the merger of NKK and Kawasaki into JFE - to be completed at the start of the financial year 2003.
SMI announced the first plank of the collaboration - the closure of the hot strip mill and one cold strip mill at its Wakayama works. The two partners will make up the supply of strip mill products and titanium sheet lost by the shut down. Steel and slabmaking at Wakayama is expected to continue after a deal with CSC to increase its slab purchases from 0.6 to 1.8 million tonnes per year. This arrangement will reduce the Taiwanese company's need to invest in steelmaking in the medium term.
This new partnership agreement in Japan may form the pattern for future rationalisation within the industry when traditional methods fail. The organisations have undertaken some lateral thinking and turned competitors into allies. This has provided opportunities for restructuring which seemed almost impossible before. Co-operation in purchasing and distribution had already been discussed.
The steel industry has suffered from overcapacity for many years. In an effort to improve unit costs, steel producers have attempted to increase output with the same or less personnel. This usually involved new investment in larger plants. Cutting production was never an option because it generated lower revenues over which to distribute the fixed costs. For this reason, mergers or acquisitions were the main options for consolidation, particularly in Europe.
In the US, the popular method has been to wait for high cost units to go bankrupt and purchase the assets but not the business, to avoid the legacy costs. This will probably remain the preferred choice. However, for the more sound enterprises, collaboration with competitors could prove to be a realistic alternative. The method may also work in other regions of the world - including the possible alliance between Magnitogorsk and Novolipetsk in Russia.
Teaming up with rivals to provide opportunities for consolidation will not be the panacea to solve the global overcapacity problem but it may make a contribution.
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