2013 New Year’s Message from Shoji Muneoka, Chairman & CEO

Jan. 04, 2013

Nippon Steel and Sumitomo Metal Corporation

2013 New Year’s Message from Shoji Muneoka, Chairman & CEO

Since the integration on October 1, 2012, we have made a good start. We are now celebrating our first new year as a reborn company. I would like to again thank those of you who have been involved in preparations and who have enabled this smooth start.

In the past three months, Mr. Tomono, our President & COO, and I have visited 12 manufacturing sites including steelworks. We walked around shop floors and talked with many of you. I was pleased and encouraged at each and every site as I saw with my own eyes that you worked together with your colleagues to overcome challenges and have endeavored to realize synergies with nearby sites or with sites which manufacture the same or similar products as you do.

I would like to talk about the current business environment and the issues of NSSMC Group have to tackle this year.

I must say that the current and future business environment is far more severe and critical than it was two years ago when we first announced we were considering the integration.

We are now facing double structural changes: drastic changes in the Japanese and global economies; and changes in the steel industries.

The changes in global economic structure were triggered by fiscal risks of developed countries. The problems are not attributable to individual companies but to issues involving the national financial system and trust. Any kind of solution to such deep-rooted problems would undoubtedly cause a great pain to its people and adjustments thus will take a considerable time. In fact, the debt crisis in Europe is expected to be prolonged, while the outlook of the United States’ fiscal problem remains uncertain.

China, Brazil, India, and other emerging countries had led the global economy for some years but are now facing slowdowns in their economies. In addition, China, in particular, is now consuming less steel to help economic growth than before.

The global economy is thus characterized by coupling, instead of decoupling, and is undergoing drastic structural changes. Here in Japan, however, the situation is even more dire.

Japan is facing national issues such as escaping from prolonged deflation and reconstruction from damages caused by the Great East Japan Earthquake of March 11, 2011. On top of that, Japan’s steel industry is heavily burdened by the so-called “sextuple whammy” including the electric power supply problem and the appreciation of the yen. Our manufacturing customers are shifting production overseas and Japan’s trade balance is expected to become vulnerable to repeated deficits soon. In the worst case scenario, Japan may be left behind the global economy and keep deteriorating.

Along with such economic structural changes, the steel industry is also experiencing structural changes. Mainly due to the Chinese economic bubble of up to 2007, global steel production capacity has expanded worldwide to reach 2 billion tons, far exceeding steel demand of 1.5 billion tons.

Given such a huge gap in demand and supply, ArcelorMittal has announced plans to shut down some steelworks in Europe, while ThyssenKrupp of Germany is proceeding with sale of its steel plants in Brazil and the United States, in combined transactions as large as one trillion yen.In China, the world’s largest producer of steel, the majority of steelmakers are losing money. Looking at South Korea, POSCO, which once enjoyed robust performance, is now obliged to reduce its assets. These examples indicate that many renowned steelmakers in the world are being forced to restructure their operations and portfolio.

The Japanese steel industry is no exception. It is also facing changes in market structure. In addition to a drop in demand for construction, manufacturers are accelerating a shift to overseas production and local procurement from overseas suppliers. It would thus be difficult for Japan’s domestic steel demand to recover from around 60 million tons per year to the previous levels of 80 million tons.

Further, the export market structure has also changed significantly. Japanese steel makers used to have an overwhelming presence in the ASEAN market but are now suffering from a severe competition with Chinese and other emerging makers in the middle grade category. Moreover, Chinese and Korean competitors have entered the high grade category, for galvanized products, tin plates, electrical steel sheet, and seamless pipe and have caused sharp decline in prices, which make it hard for us to secure profit.

As you can see, the situation is quite dire. However, NSSMC, in the midst of structural changes in the steel industry, has to survive and win out in this most competitive East Asian market.

I believe that we must respond to structural changes in the global economy as well as in the steel industry by rapidly restructuring our own operations.

Because of the integration of Nippon Steel and Sumitomo Metal Corporation, NSSMC is in an advantageous position to carry out large-scale positive and constructive measures toward becoming an even more robust and competitive company. In this sense we are different from European or U.S. steelmakers which have no choice but to seek restructuring by adopting negative and backward-looking measures. We must seek great improvement which cannot be attained by our competitors.

We are determined to change wherever we need to change through integration. We must immediately reform  our structure and practices in profit making, financial areas, and manufacturing.

Meanwhile, we will not change and do everything we can to maintain our valuable assets such as relationship of trust with customers, local communities, and employee union.

The current business environment is severe indeed, but we shall not be too pessimistic over the future of steel industry. The global steel demand is 1.5 billion tons at present but is forecasted to reach 2 billion tons by 2020. What we need to do then is simply to focus on winning competition in the global market.

To achieve this goal, I would like to emphasize the following two initiatives.

First is that we make the most of our capabilities and strengths as an integrated company. Please keep in mind the slogan of “the Best for the New Company.” I urge you to break through the remaining walls between both companies, get together with your colleagues and move things forward with the mindset of one united company. 

Second is that we do what is needed to become the most robust and competitive company. To attain this goal, we must implement our four strategies in a quick and thorough manner, as I mentioned on October 1 last year.

Our first strategy is to “Improve Cost Competitiveness.” We must attain cost competitiveness which beats emerging mills and win out in global competition. We will make plans and implement measures together with subsidiaries and supporting companies. The measures include not only cost reduction in each plant or product line but also productivity gains through optimal allocation of tasks among production lines as well as integration of manufacturing processes, by eliminating the remaining walls between both companies.

Our second strategy is to “Advance Technologies.” Our forces in R&D, manufacturing, and sales must work together to advance technical capabilities in all aspects including product development, manufacturing, production processes, energy-saving, and environment-related measures. We must keep running ahead our competitors and even expand the lead.
The third strategy is to “Globalize Steel Business.” In emerging countries where steel demand is expected to grow along with their economic growth, competition may be severe but there are a plenty of opportunities to grow and expand together with customers. We will endeavor to expand global production and supply bases and overwhelm our competitors. I would like to encourage those of you working overseas to get to know your local communities and customer needs and expand your business by cooperating with local partners and their people. Your efforts will directly contribute to growth of the NSSMC Group.

Our fourth strategy is to “Strengthen Engineering, Chemicals, New Materials, and System Solutions Businesses.” Each segment company is about to be ready to make the most of its strength through the strategy of concentrating on its core competence. I expect each company to enhance presence in its respective market by supplying excellent products and services, and also seek to stabilize its business strength by improving costs and the financial structure.

We do not have much time left to implement the two initiatives I mentioned, namely “to make the most of our capabilities and strengths as an integrated company” and “to become the most robust and competitive company.” We cannot survive the severe competition we face unless we rapidly realize synergy effects and establish competitive strength. That is something our competitors cannot do. We must make every effort to simultaneously implement and achieve these initiatives.

Having said that, this year will be important as the start of our mid-term business plan, which we are currently drawing up. The success of the mid-term business plan and the survival of NSSMC, in other words whether we can win in global competition and sustainably grow as the “Best Steelmaker with World-Leading Capabilities,” depends highly on how fast and how much we can achieve this year.

Together with Mr. Tomono and each and every one of you, I am determined to make this company the “Best Steelmaker with World-Leading Capabilities.” Let us work hard towards this goal.

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