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Nippon Steel resolves boardroom spat over Brazil's Usiminas

Three-year dispute with Ternium ends with power-sharing accord over joint unit

Usiminas operates this steel mill in Ipatinga, Brazil.

TOKYO -- Nippon Steel & Sumitomo Metal has resolved years-long differences with Ternium over governance at their jointly held Brazilian unit Usiminas, the Japanese steelmaker said Friday.

Ternium, a steel group based in Argentina, controls 40% of Usinas Siderurgicas de Minas Gerais, commonly known as Usiminas, while Nippon Steel owns 33%. The two sides have fought for three and a half years for control over the Brazilian steel producer.

The feud started in September 2014 when Nippon Steel, citing compliance violations, led the removal of then-Usiminas CEO Julian Eguren, a Ternium alum. Usiminas' earnings started going south in 2015, and the conflict escalated over the restructuring of the company.

The friction came to a head last March when the Usiminas board of directors voted to oust Romel de Souza, the CEO backed by Nippon Steel. That made room for Sergio Leite, the vice president supported by Ternium, to take his place.

Nippon Steel denounced the move and took the matter to Brazilian courts. The case highlighted how far the relationship between the two sides had deteriorated.

But the partners have managed to defuse the situation, reaching an agreement to introduce new governance rules in May. Under the new arrangement, one party will hold the right to nominate the CEO while the other will be able to name the chairman. Every four years, or the period spanning two consecutive two-year terms, these appointment powers will be switched.

Ternium, which gets to pick the CEO first, will stick with Leite for the initial two years. Nippon Steel says it will nominate Ruy Hirschheimer as chairman. The agreement also grants each side the right to choose three members of the six-person executive board consisting of the CEO and five vice presidents.

Both parties have agreed to drop all pending legal disputes. The end of hostilities came as improvements in the business as well as the passage of time put Nippon Steel and Ternium in a mood for reconciliation.

Business conditions worsened when Brazil's economy stagnated under the commodities slump. The downturn in the global market, coupled with high cost structures, also dented the Brazilian steel industry.

But the Brazilian economy bottomed out, and domestic production of crude steel climbed 10% last year to roughly 34 million tons. Usiminas reported a 315 million real ($95.1 million) net profit for the year ended in December 2017, the first black ink in three years. The company bled 577 million real in 2016.

Japanese blast-furnace steel manufacturers do not fully own any offshore mills because building such a facility is risky, with construction costs running into hundreds of billions of yen (100 billion yen equals $923 million). Instead, Nippon Steel made a limited investment in Usiminas just large enough to turn the Brazilian steelmaker into an equity-method affiliate. JFE Steel, another major Japanese steelmaker, has done the same with India's JSW Steel.

The drama surrounding Usiminas illustrates a quandary for Japanese steelmakers. Crude steel output inside Japan appears unlikely to grow significantly, given the declining population and offshoring of domestic manufacturers. But bolstering their overseas presence means exposing themselves to unpredictable business risks in emerging markets, as seen in Nippon Steel's power struggle at Usiminas.

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