Posted on 06 Sep 2017
Consolidation talks by Japanese electric-furnace operators have focused attention on Nippon Steel & Sumitomo Metal, whose many electric-furnace affiliates give the steel giant the potential to reshape a market that features dozens of rivals.
Activists at work?
Tokyo Tekko and Itoh Iron & Steel -- ranking ninth and 12th in the market, respectively -- entered merger talks in late August, a move welcomed by Kentaro Kawachi of SMBC Nikko Securities.
The electric-furnace industry "still needs to reduce the number of players," Kawachi argued, citing a supply glut. "I'd like to see these merger talks serve as a catalyst for reorganization."
Effissimo Capital Management, created by former colleagues of activist investor Yoshiaki Murakami, recently became Tokyo Tekko's top shareholder. Though a Tokyo Tekko executive asserted that Effissimo has nothing to do with the merger talks, the Singapore-based fund has shown a nose for consolidation opportunities elsewhere. It holds a roughly 38% stake in Kawasaki Kisen Kaisha, which combined its mainstay container-shipping operations with those of Japanese peers in July.
Tokyo Tekko is not Effissimo's only steel-related investment. The fund also holds a roughly 5% stake in Osaka Steel, which is 60% owned by Nippon Steel & Sumitomo Metal.
Osaka Steel had a run-in with another activist fund in 2007, when Ichigo Asset Management led a revolt at a shareholders meeting that torpedoed a proposed merger with Tokyo Kohtetsu. Talks reopened after Ichigo unloaded its Tokyo Kohtetsu stake in 2014, and Osaka Steel finally made the company a subsidiary last year.
This experience prompted Nippon Steel to keep a close eye on Effissimo, but the fund does not seem to be pushing for any mergers involving Osaka Steel. Effissimo was represented at this year's general shareholders meeting but reportedly made no comments.
A potential turning point
A Nippon Steel executive hinted that the company may not wait for a kick in the pants from an activist investor, saying consolidation will come through the "natural flow" of business. The steelmaker holds stakes in five of Japan's top 10 electric-furnace operators -- market leader Topy Industries, Kyoei Steel, Nakayama Steel Works, Godo Steel and Osaka Steel -- and its investments include unlisted companies such as Oji Steel.
Noting that the current investment structure has existed for about a decade, a senior Nippon Steel official said the question involves "whether to bundle our investee companies together or let them stay independent and combine their production or sales."
JFE Holdings undertook a group realignment in 2012, consolidating four money-losing electric-furnace operators. The move let the combined company, JFE Bars & Shapes, cut costs by streamlining plant and sales networks. JFE Bars & Shapes has turned a net profit in each of the five fiscal years since the reorganization.
Nippon Steel has been treading water of late in some respects. The medium-term management plan through this fiscal year targets return on equity of at least 10%. But this goal may need to be postponed, given unclear prospects for maintaining price hikes on steel products into next fiscal year and beyond. The steelmaker's shares also have remained range-bound this year, hovering around 2,500 yen.
Nippon Steel is making progress in its blast-furnace business, with production and other synergies from the acquisition of Nisshin Steel in March expected to contribute at least 20 billion yen ($183 million) to annual profits. If the steelmaker can trim fixed costs and lift selling prices through consolidation on the electric-furnace side as well, the outlook for profits and shares should brighten.
