TOKYO — Facing a protracted supply glut and environmental pressure, Nippon Steel will reduce production capacity by 20% under its new five-year plan, the company said Friday, a sweeping reorganization that will affect 10,000 workers.
By slashing capacity, the Japanese steelmaker hopes to free up more resources to grow its business and develop green technologies as it plots its future in a changing industry.
“Everything is moot if we cannot change quickly,” President Eiji Hashimoto said a virtual news conference.
This comes just a year after the closure of its Setouchi Works Kure Area and other streamlining measures Nippon Steel announced in February 2020. Now the company is planning even deeper cuts, from shutting a blast furnace at its East Nippon Works by the end of fiscal 2024 to closing another furnace at its Kansai Works in the first half of fiscal 2021, a year earlier than planned.
Overall, Nippon Steel will reduce the blast furnaces it operates in Japan to 10 from 14, cutting its capacity for crude steel by 20%.
In light of the closures, combined with digitally driven efforts to boost efficiency, Nippon Steel aims to reduce its workforce by 10,000 or over 20% including at its contractors by fiscal 2025. Nippon Steel will not offer early retirement as part of the change, looking instead to transfer affected workers to different operations. It will discuss with individual contractors regarding their employees.
Nippon Steel’s moves are driven by two main factors: years of sluggish earnings at its Japanese operations and growing pressure to curb carbon emissions.
Nippon Steel is expected to book a 120 billion yen ($1.11 billion) group net loss for the fiscal year ending this month, following its record 431.5 billion yen loss the year before.
In 2019, its earnings before taxes and interests came to $14.70 per ton — above European rival ArcelorMittal’s $13.40, but significantly under the $75.30 made by South Korea’s Posco or $25.50 by China Baowu Steel Group.
In addition to headwinds at home, Japan’s steel-makers have also been hit hard by a glut of cheap Chinese steel. China’s crude steel production has increased 30% in five years to 1.05 billion tons in 2020, accounting for more than half of global output. Materials not used at home flood into Asian markets, competing with Japanese exports.
“Our business environment is only getting tougher,” Hashimoto said in a message to Nippon Steel employees in January. “We will need to tackle major structural reforms this year.”
The Asian steel market could sputter should China, whose economy has recovered from the coronavirus’ impact ahead of other major economies, steps up production again. Cutting capacity is key for Nippon Steel to boost efficiency and focus its resources on areas where it differentiates itself from rivals, like automotive steel plates.
The growing push for decarbonization in Japan and across the world plays into Nippon Steel’s streamlining push as well.
Japanese Prime Minister Yoshihide Suga announced last year that the country will aim to achieve carbon neutrality by 2050. The move has energized Japan’s debate on carbon pricing, where companies would essentially pay for the emissions they produce.
“Carbon pricing will distort the market,” Hashimoto told Suga in a February meeting.
Steelmaking is a carbon-intensive industry, since blast furnaces used in production run on coke, a coal-derived fuel. Nippon Steel in particular is one of Japan’s largest corporate emitters, producing 94 million tons of carbon dioxide a year — which could potentially cost the company hundreds of millions of yen annually under a carbon pricing scheme.
But Nippon Steel has not turned a blind eye toward climate change. The company’s five-year plan calls for net zero carbon dioxide emissions by 2050, which aligns with the government’s goal.
Nippon Steel aims to achieve its zero-carbon steel initiative by adopting carbon capturing technology and hydrogen reduction methods, which eschews the use of coke. Those changes will demand a complete face-lift of Nippon Steel’s blast furnace processes, and investments between 4 trillion yen to 5 trillion yen.
Global rivals are pursuing decarbonization as well. Last year, ArcelorMittal sold off its U.S. subsidiary, including the unit’s blast furnaces, to Cleveland-Cliff, an American iron-ore company. ArcelorMittal will offload underperforming assets as it shifts toward investing in green tech in Europe and elsewhere, which will wean the company away from blast furnaces.
The Chinese government is moving toward consolidating domestic steel-makers, which would potentially give birth to entities capable of producing 100 million tons of year. Although Japanese counterparts have taken the lead in developing green technology, it is only a matter of time before scaled-up Chinese rivals catch up.
“If things don’t change, Japan’s steel industry itself will find it difficult to survive,” said Atsushi Yamaguchi, senior analyst at SMBC Nikko Securities.
Nippon Steel’s five-year plan calls for 2.4 trillion yen in capital expenditures. The company will also spend 600 billion yen to expand the Indian steel operation and to acquire steel mills in other countries.
The midterm plan envisions Nippon Steel’s global output capacity to jump to 100 million tons from 70 million tons. But if the group fails to regain its earning capacity, the overseas expansion will stall.