***INTERVIEW: Eiji Hayashida, JFE Steel

Eiji Hayashida is the president and ceo of JFE Steel, Japan’s second-largest steelmaker by tonnage in 2009.

JFE’s focus is now largely overseas and you have a number of projects planned for foreign markets. Let’s start with China. What are your plans here?

Originally, we had planned to build a blast furnace in China. But the government would not allow us to have a majority share.

There are also a lot of new projects going on in China, so I don’t think we should get into that particular market. Through the blast furnace at least — I don’t want to create excess capacity in China.

[So] our focus is mainly on automotive grades in China.

We set up a joint venture in Guangzhou six or seven years ago. Now we are producing 350,000 tpy of galvanized sheet for automotive applications.

And we have a new facility coming up next year. This will be another continuous galvanizing and cold rolling line.

This project will give us additional capacity of 400,000 tpy of coated steel and a new cold rolling mill able to process 1.8 million tpy.

It’s a big one, and we will have 50% ownership of the project.

So that the joint venture can produce automotive grades, we are going to export our hot rolled coil for the company to cold roll.

For other grades, the joint venture may buy steel in China from local producer. But the high-quality product will come from JFE.

What about outside China? The Vietnamese government recently gave JFE permission to build a blast furnace there. Is that something you plan on doing soon?

I believe there are three main countries where we can expect significant growth in Asia: Vietnam, Thailand and Indonesia.

In Indonesia, Posco has already announced a joint venture with one company to build a steelmaking plant. So that is enough.

The potential for us is in Thailand or Vietnam. But, at the moment, I really don’t think there is enough demand for steel for us to build a blast furnace yet. This will be more of a long-term project.

Vale and Dongkuk have agreed a joint venture to produce slab in Brazil. South Korea’s Posco is also interested. What is JFE’s interest in this project?

We are the largest shareholder in Dongkuk, so you can view JFE’s interest as being part of Dongkuk’s.

But there are no definitive plans yet, it will probably be six or nine months before there is a final decision.

Dongkuk has three plate mills and needs around 3 million tonnes of slab each year. So a lot of the slab will go to Dongkuk.

Of course we also have a joint venture in the USA: California Steel.

So Dongkuk and California Steel are the main candidates to purchase those particular slabs.

The investment you have made in India’s JSW Steel is very significant, valued at around $1 billion. What are your plans there?

We have a stake of slightly less than 15% in JSW; we are going to provide the technology for automotive grades of steel so that the company can serve automotive transplants in India — Suzuki, Toyota, Nissan and so on. That’s the first step.

But demand in India is definitely going to grow.

JSW has a specific plan to build a blast furnace in West Bengal. We may join that particular plan, but the concept has yet to be finalised. We don’t know what kind of products it will make or which markets it will target.

I think our existing plan is enough to fulfil the demand for automotive grades for the next couple of years. But, in the future, demand is going to grow.

In India, small cars are quite popular at the moment. The quality of steel these cars require is not that high.

But automobile manufacturers in India are eventually going to produce high-quality cars. To do that, they will need our technology.

Automotive will remain a strong place to be in the future, and we will probably focus on this sector for the next couple of years.

Of course we will increase the volume of steel we produce through new projects in India and other places.

But our target is to increase our output of quality steel rather than commodity steels to increase our corporate value.

But what about investments in other product groups? Can you tell us about JFE’s recent investment in Sichuan Pancheng Yihong Pipe?

We have formed an alliance with the Chinese company.

JFE will produce quite high high-grade alloy steel seamless pipe, specifically the most popular 13% chrome seamless pipes.

But customers often want both carbon and stainless steel pipes.

In Japan it is very difficult to produce carbon steel seamless pipe at low cost. So what we will do is produce the high-grade tubes, the Chinese company will produce the carbon steel seamless pipe and we will jointly sell the products to the Chinese market.

So JFE is looking to grow overseas through this kind of investment, joint ventures and alliances. But what about your operations at home?

The Japanese manufacturing sector is recovering slightly but I don’t really don’t think we are going back to the levels of 2007.

In my opinion, the domestic industry is still slow. For example, the automotive sector used to produce almost 11 or 12 million units per year, plus several million for export.

The best we will probably see in the future is 10 million or 10.5 million.

Companies are building new plants in the rest of Asia and other countries. So we will increase our exports to these transplants.

That’s the way we are running the business — the domestic market is shrinking. In order to cover that, we have to export more.

At the moment we export about 50% of our production. Exports will grow to become more than 50% of our output. I would say 55%, possibly 60%.

But in my opinion, as long as we are selling steel to Asia, there is not such a big difference between selling to export customers and domestic customers.

Asia is just one market and the freight is very cheap: it doesn’t make any sense to distinguish exports from domestic sales.

Let’s look upstream. The introduction of quarterly iron ore contracts earlier this year has been a headache for most steelmakers. JFE has introduced new, more flexible steel pricing as a result. How is that going?

Our steel prices are not only decided by raw materials prices. There are many other factors that determine the price.

At the moment, the increase in raw materials prices is significant. We cannot offset this cost increase internally.

Our customers understand the situation. They need a stable supply of material, so they have to accept the price.

Originally, I thought it would be very difficult to negotiate prices on a quarterly basis. But, once we tried, we found it was relatively easy for us to reach a mutual understanding with automotive companies.

So the negotiations went relatively smoothly this year.

But I still believe that annual contracts are better than quarterly contracts, both for the supplier and the customers.

And I am concerned about the cost of steel.

As a basic material, the advantage of steel is its strength, its formability, and also its cost. These three factors are critical for steel.

Once the raw materials rise, steel costs and prices go up compared with other materials like aluminium and plastics. It is very important for the steel industry to maintain its costs.

I suppose my point is that iron ore is used only for steel. So if the mining companies continuously increase their prices, then demand will shrink.

That means they are killing themselves.

How is JFE planning to cope with rising raw material costs?

We are now working with Q Coal in Australia. We took a 20% stake to get access to high-quality coking coal.

There are a couple of other small projects going on.

In Brazil and Australia we have small projects for iron ore. We also have a couple of coking coal projects in Australia.

Within two years the company will spend 200 billion yen. We are looking all over for those assets.

We have other challenges as well.

The tax here is very expensive. And exchange rates have significantly changed, so it’s difficult to justify exports. You have to compete with South Korea and China. Japan is quite behind.

For the steel industry, it’s difficult to move facilities overseas. But, for the assembly industry its very easy to move a plant. That’s my concern for the Japanese economy.

So Japanese companies can survive, definitely. But are they going to survive in Japan or outside Japan? That’s the question.

There are 28 blast furnaces in Japan, including some of the world’s largest. Will they always be there? Or is there only a future for 12 or 14?

Nobody knows.