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Commodities

Nippon Steel to slash 20% of domestic capacity

Overcapacity and government's carbon neutrality push put blast furnace on ice

As Nippon Steel consolidates its production plants, about 3,000 employees are likely to be relocated. (Source photos by Hirofumi Yamamoto and Kyodo) 

TOKYO -- Nippon Steel plans to freeze production at a blast furnace at its plant in Ibaraki Prefecture, near Tokyo, Nikkei has learned, the latest example of its efforts to deal with overcapacity in Japan.

With an earlier decision to halt three other blast furnaces, the steelmaker will cut its domestic capacity by 20%.

While demand from automakers is increasing, overcapacity remains an issue for the company. Furthermore, Nippon Steel is under pressure to reduce its use of blast furnaces, which emit large amounts of carbon emissions, as Prime Minister Yoshihide Suga pushes Japan toward carbon neutrality.

The production freeze, which is to take place within several years, is planned for one of two blast furnaces at the Ibaraki plant. By simple calculation, the blast furnace accounts for about 10% of the group's total production capacity.

The decision follows an earlier one to shut down three furnaces elsewhere, including at a Hiroshima plant.

Blast furnaces are the core of a steel mill; they melt iron ore at high temperatures and produce raw materials for various steel products. Once operations begin, they do not stop for more than 10 years. Restarting a cold blast furnace carries a heavy price.

The company also intends to eliminate and consolidate some of its rolling and other processing lines. Some of the roughly 3,000 employees affected are likely to be relocated.

Although automobile production has recovered from late last year, the company's steelworks have not yet reached full operation.

The Organization for Economic Cooperation and Development estimates that Japan's crude steel capacity was 130 million tons as of 2019, but actual production was 99 million tons. This shows the country has about 30% more capacity than it needs.

A sudden drop in steel demand due to the pandemic made matters worse. Domestic crude production in 2020 fell to 83.19 million tons, with nearly 60% of capacity not being utilized.

Demand for steel pipe, used in shipbuilding and in oil and gas field development, is expected to continue to be sluggish. "Production will not return to 90 million tons even after the pandemic," a steel trading company executive told Nikkei.

The move also is in line with the Japanese government's goal to cut the country's greenhouse gas emissions to net-zero by 2050. Since blast furnaces use coal-based coke for combustion, they emit a large amount of CO2. The steel industry is lagging in reducing greenhouse emissions. Nippon Steel in fiscal 2019 emitted 94 million tons, one of the highest totals for a Japanese company.

The current steelmaking method, which relies on blast furnaces, makes it difficult for Nippon Steel to promote decarbonization. Renovating equipment would require tens of billions of yen.

The rise of Chinese rivals is also making it difficult for Japan to keep its blast furnaces operating. Amid Chinese companies' increased production, raw material prices have remained high despite the steel market's sluggishness.

Nippon Steel in the fiscal year through March 2020 posted a consolidated net loss of 431.5 billion yen, its largest-ever deficit.

The steel market is recovering as China drives demand, but if the second largest economy turns to exports, there is a risk of the business environment deteriorating again.

In addition to the Ibaraki plant, Nippon Steel has announced the suspensions of two blast furnaces in Hiroshima Prefecture and another in the city of Wakayama, western Japan. The latest decision means Nippon Steel will be operating 10 blast furnaces, down from 14.

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