TOKYO -- JFE Steel will about spend 27 billion yen ($215.2 million) to acquire a 5% stake in an integrated steelmaking plant Taiwan's Formosa Plastics Group is building in Vietnam.
As demand for steel products in Japan tapers off, overseas production is the key to the Japanese steelmaker's growth. The Nikkei recently spoke with JFE Steel President and CEO Koji Kakigi about the investment.
Q: What kind of returns do you expect the investment to generate?
A: Formosa Plastics has achieved few notable results in the steel business, but it is a leading global chemical plant operator. I visited the steelworks under construction in Vietnam in July and recognized Formosa Plastics' high level of technology.
Some analysts said construction costs are high for a facility that will produce 7 million tons of crude steel. But as the capacity is to be raised to 20 million tons in the future, the plant is expected to be one of the most competitive in Asia.
The domestic market for steel products will inevitably shrink. It's important to secure semifinished products and intermediate materials in Southeast Asia, where demand is expected to keep growing. If the Vietnam plant starts producing a stable supply around 2018, we will be able to offer semifinished products, such as hot-rolled steel, to our local and other plants in place of exports from Japan.
Vietnam will become our supply base in Southeast Asia.
Q: The growth of your overseas earnings has been slowing. How can you turn the tide?
A: We have invested in China, Southeast Asia and India, but I must admit that earnings from those operations are not enough. We can reduce our manufacturing costs by participating in the steel mill in Vietnam.
Prices of steel products remain low due to oversupply from China. But the Chinese government is expected to promote the closure and consolidation of production facilities for the sake of environmental protection. I hope this will improve the supply-demand balance.
Q: JFE Steel does not have a production base in North America, where automotive steel products are in high demand. What are your plans for that market?
A: As auto production is increasing in North America, including Mexico, we intend to firm up our plans regarding local production of automotive steel products. Though we are behind industry leaders with local plants, such as Nippon Steel & Sumitomo Metal, our top-level technology would allow us to compete.
Q: How will overseas expansion affect your domestic production system?
A: Exports of semifinished products to Southeast Asia will decrease when production at the Vietnam steelworks begins. We would like to use the spare capacity to produce high-end steel products. We could also increase production of steel sheet and pipe for the energy market.
We will reduce our manufacturing costs by upgrading coke ovens, in-house power generation and other upstream production facilities. We are not considering domestic production cuts, such as a suspension of blast furnace operations.
Interviewed by Nikkei staff writer Sayaka Hayashi