Nippon Steel will reduce production capacity by 20%

Nippon Steel plans to freeze blast furnace production at its plant in Ibaraki prefecture, near Tokyo, in the latest example of its efforts to overcome overcapacity in Japan.

Having made an earlier decision to shut down three other blast furnaces, the steelmaker will reduce internal capacity by 20%.

While demand from automakers is growing, overcapacity remains a problem for the company. In addition, Nippon Steel is under pressure to curtail the use of blast furnaces, which emit large amounts of carbon, as Prime Minister Yoshihide Suga pushes Japan toward carbon neutrality.

The production freeze, which is expected to occur within several years, is planned at one of two blast furnaces at the Ibaraki plant. According to simple calculations, the blast furnace accounts for about 10% of the group’s total production capacity.

The decision follows an earlier decision to close three furnaces elsewhere, including the Hiroshima plant.

Blast furnaces are the core of the steel mill; they melt iron ore at high temperatures and produce raw materials for various steel products. After the start of work, they do not stop for more than 10 years. Restarting a cold blast furnace is costly.

The company also intends to liquidate and consolidate some rolling and other technological lines. Around 3,000 employees are expected to move.

Although car production has rebounded since the end of last year, the company’s steel plants have yet to reach full capacity.

The Organization for Economic Co-operation and Development estimates that Japan’s crude steel production capacity for 2019 was 130 million tonnes and actual production was 99 million tonnes. This shows that the country has about 30% more capacity than it needs.

The sudden drop in steel demand due to the pandemic made things worse. Domestic oil production in 2020 fell to 83.19 million tons, with almost 60% of production capacity not being used.

Demand for steel pipes used in shipbuilding and oil and gas development is expected to remain low. “Production will not return to 90 million tonnes even after the pandemic,” the steel company executive told Nikkei.

The move is also in line with the Japanese government’s goal of reducing the country’s greenhouse gas emissions to zero by 2050. Since blast furnaces use coal coke for combustion, they emit large amounts of CO2. The steel industry is lagging behind in reducing greenhouse gas emissions. Nippon Steel produced 94 million tonnes in fiscal 2019, one of the highest for a Japanese company.

The current blast furnace method of steelmaking is making it difficult for Nippon Steel to decarbonize. It will take tens of billions of yen to repair the equipment.

The growing number of Chinese competitors also makes it difficult to keep blast furnaces running in Japan. On the back of increased production by Chinese companies, raw material prices remained high despite a sluggish steel market.

Nippon Steel posted a consolidated net loss of 431.5 billion yen for the fiscal year to March 2020, the largest deficit on record.

The steel market is recovering as China stimulates demand, but if the second largest economy switches to exports, there is a risk that the business environment will deteriorate again.

In addition to its Ibaraki plant, Nippon Steel announced the suspension of two blast furnaces in Hiroshima Prefecture and another in Wakayama, western Japan. The latter decision means that Nippon Steel will operate 10 blast furnaces instead of 14.

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