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Business trends

Japan's JFE shuts blast furnace as outlook dims

Steel industry slashes capacity on trade war and Chinese competition

The closure of the blast furnace will reduce JFE's crude steel production capacity by 13%.

TOKYO -- JFE Steel will close a blast furnace at its eastern domestic hub as cooling demand and increased Chinese production force Japanese steelmakers to reassess their strategies.

The closure, slated for completion by fiscal 2023, will reduce the company's crude steel production capacity by about 4 million tons annually, or around 13%, JFE said Friday. Japan's No. 2 steelmaker also will shut down hot-rolling equipment used to make products such as automotive steel sheet.

The decision follows market leader Nippon Steel's announcement of major capacity cuts last month, reflecting the difficulties in an industry where both supply and demand factors -- including U.S.-China trade tensions -- are squeezing prices.

"The weakness in the steel market and the decline in demand caused by the global economic slowdown will continue," JFE President Yoshihisa Kitano said. "Given how intense the competition is, we have too much capacity."

JFE said the shutdown at the facilities in Kanagawa Prefecture outside Tokyo affects about 1,200 workers, who will be reassigned. An additional 2,000 people employed by JFE group companies and partners also will be affected.

The reduction in costs will boost annual earnings by about 60 billion yen ($545 million), the steelmaker said.

Parent JFE Holdings said Friday it now expects to report a group net loss of 190 billion yen for the fiscal year ending March 31, a steep downgrade from the previous estimate of a 13 billion yen profit. The company cited a 220 billion yen impairment loss on the value of its eastern steelworks.

After JFE formed in 2003 via a merger, the group honed its competitiveness by concentrating resources into two hubs: the East and West Japan Works. But the relative weakness of the eastern side, given that the west accounts for about 70% of the company's crude steel capacity, has long been an issue. The western facilities produce large volumes of automotive steel sheet, making them more cost-competitive.

The U.S.-China trade war pushed JFE to confront this problem. Even as a slowing global economy eroded demand for steel products, China -- which produces half the world's crude steel -- cranked up output at an accelerating pace.

With steel prices sinking and material costs surging, the Japanese company decided to scale back the lower-margin Kanagawa side of the eastern works.

These tough circumstances also spurred structural reform at Nippon Steel, which last month announced the closure of its Hiroshima Prefecture steelworks and a furnace at its Wakayama Prefecture works, lowering the company's domestic crude steel capacity by about 10%. These moves were revealed alongside a revised forecast predicting a record 440 billion yen loss for fiscal 2019.

Japan's steel industry had 30% too much capacity as of last year, by one estimate. The cuts by JFE and Nippon Steel amount to more than 20% of total capacity.

The coronavirus pandemic has made the industry's outlook even grimmer. Japanese blast furnace operators, including Nippon Steel and JFE, export about 40% of what they produce. With customers such as Toyota Motor shutting factories, steep cuts to crude steel production look likely.

Though JFE's Kitano said "the coronavirus was not the deciding factor in this structural reform," he noted that temporarily shutting other blast furnaces remains an option if demand declines further.

"We can't predict how much the coronavirus shock will reduce crude steel output," said Atsushi Yamaguchi, senior analyst at SMBC Nikko Securities. "If automobile production stays depressed for a year or so, annual crude steel output could fall by as much as half."

Nippon Steel and JFE could signal a much wider trend.

"The coronavirus is exposing weaknesses like excess capacity across a wide range of industries," a steel industry insider said. "Restructuring will probably ramp up not only in steel, but also in areas such as shipbuilding and chemicals."

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