Kobe Steel May Be ‘at Center’ of Consolidation, Citigroup Says

Kobe Steel Ltd., Japan’s fourth- largest maker of the alloy, is “likely to be at the center” of moves by the nation’s producers to combine, Citigroup Inc. said, upgrading the stock to a “Buy.”

A merger between the No. 1 and No. 3 producers Nippon Steel Corp. and Sumitomo Metal Industries Ltd., announced Feb. 3, should help Japan’s steelmakers claw back profits eroded since 2003 and make further tie-ups in the industry “inevitable,” Toshiyuki Johno, a Tokyo-based analyst, said in a note to investors yesterday.

“The merger is a potential game-changer for the Japanese steel industry and may trigger another round of consolidation both in Japan and elsewhere,” he said. Kobe may “ally with a peer to ensure a recovery of value-added in the industry.”

Japanese steelmakers need to regain pricing power in talks with raw material producers to return to profit after three of the top five posted losses in the last financial year. The steel companies have struggled with a shrinking domestic economy, deflation, a shift of domestic manufacturing orders overseas, as well as “a few” coking coal and iron ore miners controlling 70 percent of supply, according to Citigroup.

Raised From Hold

Citigroup’s Johno raised Kobe from a “Hold” and set a 12- month target price of 280 yen （$3.34）. Kobe steel closed at 229 yen on the Tokyo Stock Exchange the day before the note was published. It’s up 16 percent this year.

Sumitomo Metal Chairman Hiroshi Shimozuma said Feb. 9 that the Kobe-based company can join the merger if it splits off its non-steel businesses. Kobe Steel declined to comment on Shimozuma’s remarks.

JFE Holdings Inc., Japan’s second-largest steelmaker, is another “possible candidate” to merge with Kobe Steel, which also makes copper and aluminum, as well as construction machinery, Johno said.

Aside from aligning its steel operations with another producer, Kobe Steel may pursue an independent path, which is likely to mean tying up with an electric-arc furnace maker of specialty steel, he said. “This could result in it taking the lead and engineering industry reorganization.”。 Its ITmk3 unit in Vietnam would be best placed for a partnership, he said.

Citigroup forecasts Kobe Steel profits to rise to 55 billion yen in the financial year ending March 31, 2013, from 6.3 billion in 2010, driven by growth in the company’s steel, resources, engineering and machinery businesses. ---source from：Bloomerg