Japan Shipyards Said to Demand Lower Steel Prices, Warn of Cuts

Oct 20, 2011 (Bloomberg) -- Japanese shipbuilders will ask local steel mills to cut prices for plate used to construct vessels or be replaced by rivals from South Korea or China as the yen strengthens, three people familiar with the matter said.

The Shipbuilders’ Association of Japan Chairman Kazuaki Kama is scheduled to meet Eiji Hayashida, head of the Japan Iron and Steel Federation, as soon as next week to demand lower prices, said the people, who asked not to be identified because the information is not public. Japanese shipbuilders, the world’s third-largest by output, pay local mills as much as 30 percent more for plates than South Korean yards, one of the people said.

The association, which counts Mitsubishi Heavy Industries Ltd. (7011) and IHI Corp. (7013) as members, is joining the nation’s carmakers in reviewing costs and prices as a near-record high yen makes Japanese products less competitive. Nippon Steel Corp. (5401) and JFE Holdings Inc. (5411), Japan’s biggest makers of the alloy, stand to lose contracts to South Korea’s Posco and China’s Baoshan Iron & Steel Co. unless they negotiate prices.

The Japanese currency, which rose to a postwar record in August, has gained 11 percent from an April low this year. It traded at 76.8 yen against the dollar as of 5:34 p.m. in Tokyo yesterday.

Toyota Motor Corp. (7203), Asia’s biggest carmaker, has told parts makers it will buy more from emerging markets should domestic mills fail to match overseas prices. Carlos Ghosn, chief executive officer of Nissan Motor Co., said this month Japan faces a “hollowing out” of its industries should the government fail to take steps to counter the yen’s rise.

The Topix machinery index, which includes Mitsubishi Heavy and IHI, has fallen 18 percent this year, compared with a 31 percent drop in the Topix iron and steel index, including Nippon Steel and JFE.

Price Talks

Shipbuilders individually hold price talks with suppliers. The industry-wide request comes as domestic yards have been unable to get cuts from their decades-long steel suppliers, which offer lower prices to international customers, one of the people said. Higher steel prices in Japan than Korea and China erode local yards’ cost competitiveness, further crippling a domestic industry struggling to win new orders, he said.

Steel accounts for about 40 percent of the cost of a ship, according to the 19-member shipbuilding group, which also includes closely held Imabari Shipbuilding Co.

Japanese shipyards had a 12.1 percent share of the global market by new orders in the first half, down 2.4 percentage points from 2010, while South Korean yards boosted their share by 23 percentage points to 56.4 percent, the Shipbuilders’ Association said on its website, citing data from IHS, formerly Lloyd’s Register.

Steelmakers

Steelmakers in Japan, the second-largest in the world, have been under pressure to pass on increased raw material costs to customers to protect profit margins after iron ore and coking coal prices soared, outpacing gains in the yen. Nippon Steel’s gross margin fell to 12.24 percent in the June quarter from 13.62 percent a year earlier.

Posco (005490), South Korea’s largest mill, boosted its heavy-plate capacity by 40 percent to 7 million tons a year in March, overtaking JFE as the biggest producer of the alloy. Hyundai Steel Co. (004020) said in July it expects to receive monthly orders for at least 10,000 tons of plates from Japanese shipbuilders in the second half of this year.

Last year, Japan imported 233,000 metric tons of plates, equivalent to 2.6 percent of the alloy produced by Japanese mills for local use, according to data from the Japan Iron and Steel Federation.