Japan Electric Furnace Steel Makers Have to Rebuild

More mergers are likely may emerge among Japanese electric furnace carbon steel makers in 2012. They have suffered low profitability due to domestic demand shrinkage for building materials as well as high ferrous scrap cost. In 2011, JFE Steel decided integration of 4 electric furnace steel subsidiaries after the Great East Japan Earthquake. Integration of Nippon Steel and Sumitomo Metal Industries may also lead to reorganization of electric furnaces of the two groups.

Japanese construction investment has shrunk since the peak 8.4 trillion yen in fiscal 1992 ended in March 1993. The current annual investment is around 4 trillion yen. Then domestic demand has decreased for electric furnace steel products, mainly rebar and H-beam. Japanese rebar output was 14.19 million tonnes in fiscal 1990 while decreased to 7.88 million in fiscal 2010, according to Japan Iron and Steel Federation. The output maintained below 10 million tonnes since fiscal 2008.

Construction investment is unlikely to recover in a long term. Japanese population is forecasted to decrease to 99 million in 2055 from 128 million in 2004. Population shrinkage would cause lower consumption for condominiums, residents, office buildings and infrastructure works.

On the other hand, Japanese carbon steel bar import expanded by 43.8% to 27,284 tonnes in fiscal 2010 ended in March 2011 compared with the previous fiscal year. The import accumulation increased by 18.9% to 19,704 tonnes for April-November 2011 from the corresponding period of the previous year. Shaped steel import expanded by 68.1% to 96,970 tonnes in fiscal 2010 from fiscal 2009 and increased by 7.6% to 68,178 tonnes for April-November 2011 from the same period of 2010.

Steel import has increased under strong yen trend. These imports would impact domestic steel market prices while the volumes would not imbalance domestic supply and demand presently.

As for metal spread, the margin between steel prices and ferrous scrap cost, the moderate spread is estimated at 25,000-30,000 yen per tonne for rebar and 30,000-35,000 yen for shaped steel. Currently Japanese electric furnaces suffer narrower metal spread. Six electric furnaces out of Japanese major 16 electric furnace carbon steel makers posted recurring losses for April-September 2011.

The latest problem is electricity cost upsurge. Electric furnaces had operated in night time to use cheaper nighttime power. However, they become unable to purchase nighttime power since domestic atomic power plants have suspended after the accident in Fukushima no.1 atomic power plant. Tokyo Electric Power announced intention to raise electric power price by 20% in and after April 2012 due to fuel cost expansion for heat power plants.

Electric furnaces’ productive cost for rebar is estimated to rise by 2,000-3,000 yen per tonne in the case to use 1,000 kW electricity per tonne for the processes from steel making to rebar rolling at 20% higher price.