Shares of Nippon Steel Corp and Sumitomo Metal Industries rallied sharply on Friday after the two firms said they planned to merge to create the world's second-largest steelmaker. Nippon Steel jumped 11.5 percent, Sumitomo Metal Industries gained 20.2 percent and the Tokyo iron and steel subindex rose 8.4 percent, reflecting expectations the merger would trigger further consolidation in the fragmented industry.
The deal is expected to help Nippon Steel and Sumitomo Metal better cope with growing competition from Asian rivals and shrinking demand from domestic automakers, as well as gain some bargaining power as raw materials prices surge.
"The merged entity would have a very good combination of flat-steel and tubular products, and exposure to growth markets like Brazil and India. With a projected 45 percent share of the domestic steel business, it may also be able to get better pricing/margins at home," Goldman Sachs analyst Rajeev Das wrote in a note to clients. "We believe that the proposed merger between SMI and NSC could create synergies for both companies, as well as benefiting domestic peers (including minimises) and the wider steel industry by helping to increase pricing and margins."
Japanese steelmakers have been particularly hard hit as domestic automakers such as Toyota Motor Corp and Nissan Motor Co build fewer cars at home and expand in emerging markets such as India using products from local steelmakers. They also face cut-throat competition from South Korea's POSCO and Baoshan Iron & Steel Co, China's biggest listed steelmaker, as Japanese automakers seek lower prices to weather an unfavourably strong yen.
Nippon Steel, which counts Japanese automakers as its biggest client, and Sumitomo Metal Industries, which is strong in seamless pipes used in the energy, construction and machinery sectors, said on Thursday they aimed to merge in October 2012. Shares of JFE Holdings, Japan's second-largest steelmaker, rose 4 percent, while Kobe Steel Ltd, which has capital ties with Nippon Steel and Sumitomo Metal Industries, jumped 6 percent.
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