Japanese Steel Giants to Launch Merger Talks

Combining Nippon and Sumitomo would create a company second only to ArcelorMittal

Japan's biggest steelmaker Nippon Steel and third-ranked rival Sumitomo Metal Industries on Feb. 2 said they would work towards a merger that would create the world's second-largest steel firm. The tie-up, which they plan to achieve by 2012, would create a steel giant second only to India's ArcelorMittal.

"It will be quite a huge task to undertake this," said Sumitomo Metal Industries president Hiroshi Tomono."We are determined to make our utmost efforts."

The new name, merger ratio and other details of the deal had still to be discussed.

A merger of the two firms, which formed an alliance in 2002, would be the first in the Japanese steel industry since the creation of the country's number two firm JFE Holdings around a decade ago.

Global competition in the steel industry has intensified in recent years with demand spurred by emerging economies such as China that are undertaking massive construction, infrastructure and manufacturing projects.

Japanese automakers, electronics makers and other companies have also sought to expand production in foreign markets in search of growth, stronger consumer demand and to avoid foreign exchange risks.

The plan was applauded by the government, which offered its backing. "This will be a pioneering example of (Japan's) efforts to fully boost global competitiveness" through industry realignment, said industry minister Banri Kaieda.

Analysts said the announcement by the two Japanese steel giants was a positive move for an industry that faces tough competition from overseas rivals, particularly South Korean companies.

"Integrating operations is the path they cannot avoid taking. This decision makes a lot of sense," said Hideyuki Araki, economist at Resona Research Institute.

"They (the steelmakers) would fall behind South Korean and other rivals unless they take action," Araki said, adding that the talks were likely to succeed as the two companies already have other business tie-ups.

"They have to put any small differences aside" to ensure their global survival, he said.

In addition to combining manufacturing sites, sales operations and research units, the improved capacity of the merged entity should be able to better meet the fast-changing needs of customers, the companies said. "The integrated company would establish a system for supplying a variety of products to customers in the world," the steelmakers said.

Nippon Steel expects sales of 4.1 trillion yen (US$50 billion) and to produce 34 million tons of crude steel in the year to March, while Sumitomo Metal expects sales of 1,500 billion yen with 13 million tons.

Copyright Agence France-Presse, 2011

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