Japanese Steelmakers Join to Bid for Stake in Brazil's Namisa Iron Ore Mines

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Researched by Industrial Info Resources (Sugar Land, Texas)--In a bid to counter the adverse effects of soaring iron ore prices and secure a stable supply of raw material, Japanese steel majors are teaming up to jointly acquire overseas iron ore mining rights and share the purchase costs among themselves. Japanese steel majors JFE Holdings Incorporated (TYO:5411) (Tokyo), Kobe Steel Limited (TYO:5406) (Kobe), Nippon Steel Corporation (TYO:5401) (Tokyo), Nisshin Steel Company (TYO: 5407) (Tokyo), Sumitomo Metal Industries Limited (TYO:5405) (Osaka) and trading concern ITOCHU Corporation (TYO:8001) (Osaka) are planning to join the venture. This initiative is being supported by the government-affiliated Japan Bank for International Cooperation, which will offer loans at low interest rates.

The consortium is initially eyeing a stake in the Namisa iron ore mines in Brazil owned by Companhia Siderurgica Nacional (NYSE:SID) (Rio de Janeiro), the largest integrated steel manufacturer in the country. With expansion activities underway, the mine is estimated to produce up to 20 million tons per year of iron ore, equivalent to 15% of the total annual demand of iron ore in Japan. If the consortium successfully bids for a stake in the Namisa mines, the steady supply of iron ore would prove beneficial not only for steelmakers but also for downstream industries such as the automobile, electronics and shipbuilding industries, which rely heavily on steel. Nippon Steel had hiked prices by 40% for contracts with domestic equipment manufacturers and shipbuilders. However, the group is up against stiff competition from international steel majors such as ArcelorMittal (NYSE:MT) (Luxembourg).

With Vale (NYSE:RIO) (Rio de Janeiro), BHP Billiton (NYSE:BHP) (Melbourne, Australia) and Rio Tinto (NYSE:RTP) (London) controlling well over 70% of the global seaborne iron ore industry, the oligopoly in the market has led to an increase in procurement costs and denies Japanese steelmakers the privilege of negotiations and bargaining power. Earlier in July this year, a consortium comprising JFE Holdings, Nippon Steel, Kobe Steel and Sumitomo Metal Industries entered into an agreement with BHP Billiton consenting to a 96.5% increase in the purchase price of iron ore lumps and a 79.88% increase in the purchase of fine ores. The price hike was commensurate in value with the deals signed by Rio Tinto with Asian steelmakers in June this year. In February, Vale had hiked prices between 65% and 70% for purchase of its iron ore by steelmakers. Vale's agreement would have been accepted as the industry benchmark, but Rio Tinto and BHP Billiton argued for the addition of a "freight premium" to the prices of the companies' ore in the Pilbara region of Western Australia. The two firms claimed that transportation of iron ore into Asia from regions such as Brazil is less expensive than that from Australia.

Japan currently imports all of the 140 million tons of iron ore it requires to meet domestic consumption each year. The country imported 13.1 million tons of iron ore in June 2008 at a value of $1.1 billion, registering a 21.6% increase in imports compared to June 2007. In the 2007-08 fiscal year, crude steel production in Japan reached 120.2 million tons, exceeding the 100 million-ton mark for the eighth consecutive year and surpassing the previous historical high of 119.32 million tons produced in 1973. Nippon Steel produced 33.63 million tons of steel accounting for 27.7% of Japan's total production of steel in the period. Domestic steel requirement for the same year was 71.27 million tons with the manufacturing sector, including the automotive, equipment manufacturing, and shipbuilding industries, registering the highest demand.

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