As Nippon Steel & Sumitomo Metal gives up the right to negotiate prices for coking coal, the steelmaker must now reassess how it passes on rising raw material costs downstream to auto and electronics makers.
Nippon Steel announced Monday that it will no longer negotiate coking coal prices with mining companies every three months, instead using spot prices calculated by S&P Global Platts and two other benchmarks to set prices. The company plans to make the switch starting with contracts for the April-June period this year.
The rise of Chinese steelmakers is altering industry practices. As Chinese and Indian steelmakers buy coking coal on spot markets, major producers have grown reluctant to sign long-term contracts, a method preferred by Japanese players.
In setting prices with end users, Nippon Steel is considering moving from fixed, long-term contracts for construction steel to monthly ones. Contracts with automakers, among the company's largest customers, are currently negotiated twice a year. "If raw material prices are linked to market rates, transparency will improve and it will be easier to pass the costs on to products," said one domestic securities analyst.
South Korean steelmaker Posco has been quick to pass on rising resource costs to end users and is far ahead of Japanese competitors in earnings. If bargaining power improves, so will earnings.
Japanese automakers want stable steel prices and are reluctant to accept sudden price changes. Rising labor costs caused by Japan's worker shortage are another reason why domestic automakers want to keep steel sheet prices at bay. "I do not think we will move to short-term pricing," one Japanese auto executive remarked.
Still, steelmakers could become unable to absorb changes in raw material prices that are linked to a volatile market if the current pricing system is kept in place. They will have to present new pricing methods to downstream users that reflect market reality.
The spot market is often speculative. Although transparency is high, the market is easily swayed in one direction or another. Japanese steelmakers will be forced to review their procurement methods, such as hedging against price fluctuation by using derivatives.
The earning power of Japan's major steelmakers has eroded since the summer of 2016 due to steeply rising prices for coking coal. Nippon Steel suffered its first unconsolidated operating loss in four years in fiscal 2016 after it was late to pass through price increases. JFE Steel also probably saw an unconsolidated operating loss. "We cannot continue with our capital investments under current conditions," warned Toshiharu Sakae, executive vice president at Nippon Steel.
In the early 1990s Japan boasted the world's largest crude steel production. Nippon Steel Corporation, now Nippon Steel & Sumitomo Metal, was the world's largest producer, but has seen its influence wane as Europe's ArcelorMittal rose to the forefront through acquisitions and Chinese companies gained prominence.
Company caught between new international forces and old domestic market