JAPAN'S STEEL INDUSTRY: RECENT TRENDS AND PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050025-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 13
• Document Creation Date: December 20, 2016
• Document Release Date: March 10, 2006
• Sequence Number: 25
• Publication Date: March 1, 1973
• Content Type: IM

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Confidential
2
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Japan's Steel Industry: Recent Trends and Prospects
1 ARCHIVAL RECr p
~ ,pI,EAS~ r :.1
AC'*Ei3CY ARCIIIVES
Confidential
ER IM 73-28
March 1973
CO No. 3 I i
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1973
JAPAN'S STEEL INDUSTRY:
RECENT TRENDS AND PROSPECTS
1. Japanese crude steel output rebounded to 97 million metric tons
last year and reached an annual rate of 110 million tons in early 1973.
Now the world's third largest producer, Japan has a good chance of
becoming the leader by the mid-1970s.
2. Running counter to the production trend, Japan's export tonnage
of rolled steel fell 10% in 1972, to about 22 million tons. The decline
reflected the tightening supply situation at home, restrictions on shipments
to the US and European Community markets, and a general settling down
from the extraordinary 34% export gain in 1971. Japan continued to
diversify its steel export market to offset "voluntary" restraint programs,
but the United States remained by far the largest overseas market.
3. Domestic and foreign demand for Japanese steel is expected to
remain strong during the next several years. The chief export thrust will
be toward less developed countries - especially those in Asia, where the
industry already has made major inroads. Japan's competitive edge in these
markets will not be altered substantially as a result of the recent dollar
devaluation and floating of the yesa. By 1975, Japan probably will be
producing about 100 million tons of steel for the home market and 35
million to 40 million tons (in crude steel equivalents) for export.
4. While continuing the export drive, Japan is expected to invest
sizable sums in steel facilities abroad, especially in less developed countries.
The industry sees these investments as a means of reducing local resistance
to Japanese exports or offsetting restrictions on them. In some cases, the
Japanese expect to use the plants to supply third markets - probably
including the United States, where they also hope to set up a steel plant.
Note: Comments and queries regard nthis publication are welcomed. They
may be directed to the Office of Economic Research,
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Background: Recent World Steel Trends
5. The world steel industry is rapidly emerging from its first recession
in a decade. Overall production fell by 2% in 1971, when demand in the
major consuming countries, including Japan and the European Community
(EC), weakened because of sluggish economic activity. In Japan, a drop
in output ended one of the longest periods of sustained, rapid growth of
any major steel industry. The largest decline in output, however, occurred
in the United States, where production fell for the second successive year.
As a result, it lost its position as the world's leading producer to the Soviet
Union (see Table 1).
United
United
European
Community
Other
World
Year
Japan
States
USSR
Kingdom
(of Six)
Countries
Total
1965
41
119
91
27
86
103
467
1966
48
122
97
25
85
106
483
1967
62
115
102
24
90
106
499
1968
67
119
107
26
99
113
531
1969
82
128
110
27
107
122
576
1970
93
119
116
28
109
130
595
1971
89
109
121
24
103
136
582
1972
97
120
126
25
113
148
629
6. In 1972, steel demand rose sharply, and all major producers
except the USSR and the United Kingdom registered sharp output gains.
Although world output rose by 8%, accelerating economic growth in the
industrialized countries caused demand to begin outpacing supply late in
the year. Steel supplies in the United States, for example, are rather tight
now, and the EC steel industry reports having difficulty meeting demand.
To cope with the situation, leading steel firms have been moving to expand
capacity as well as activating facilities idled during the 1971 slowdown.
7. Despite the industry's widespread recovery last year, the trend
toward restricting international trade in steel continued. In the late 1960s,
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the United States negotiated "voluntary" agreements limiting steel
shipments from Japan and the EC to the US market. In 1972, controls
on these shipments became much more restrictive, and the EC pressured
Japan into placing tight limits on shipments to the Community. As a result,
about one-third of Japan's steel exports now go to markets covered by
restraint programs.
The Japanese Industry's Recent Performance
8. In 1971, Japan's steel industry experienced its first slump since
1962.1 Production fell by about 5%, to 89 million tons, because of sharply
reduced domestic consumption arising from the general economic slowdown.
Domestic consumption, in terms of crude steel equivalent, fell by 12 million
tons - or 18% - but more than one-half of this drop was offset by a
large increase in exports.
9. With the decline in sales and production, Japanese steelmakers
established an industrywide cartel to avoid price-cutting competition at
home, sharply lowered their long-term production goals, and stretched out
planned investment in new plant and equipment. Scheduled completion of
the first stage of Nippon Steel's large Oita plant, for example, was delayed
about a year - to 1972. Prior to the 1971 slump, the industry expected
to produce around 150 million tons of steel by 1975, which would make
Japan the world leader. In the midst of the slowdown, however, that goal
dropped as low as 120 million tons.
10. The industry's pessimistic mood evaporated with the recovery of
output in 1972. Production began speeding up early in the year, as economic
growth accelerated; for the year as a whole it advanced by 9%, to an all-time
high of 97 million tons. Although the industry is now producing at an
annual rate of about 110 million tons, it still is having difficulty satisfying
domestic demand. In fact, efforts have been made recently to meet a
shortage of semifinished steel by importing from the United States.
11. With the strong rebound in demand, the industry has been trying
to bring idle facilities into full operation as quickly as possible and has
stepped up its investment program. Plant capacity approximated 124 million
tons at the end of 1972, compared with 104 million at the end of 1970.
Despite the stretch-out of investment spending in 1971, outlays for new
plant and equipment during 1971-72 totaled about US $4.7 billion, as
against only $2.7 billion in the United States and $4.9 billion in the six
EC countries.
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Export Trends
12. While output rose by 8 million tons in 1972, steel shipments to
overseas markets declined by 2 million tons from the abnormally high 1971
level - mainly because strong domestic demand reduced the supplies
available for export. Japan could not reasonably expect much, if any,
expansion in foreign sales last year, given its 1971 export performance.
In 1971, Japanese efforts to maintain output despite declining domestic
sales led to an extraordinary 34% rise in export tonnage, to 24 million
tons of rolled steel valued at $3.7 billion. The feat was all the more
remarkable, considering the decline in worldwide demand. As a result, Japan
exported 34% of its rolled steel output in 1971 and accounted for 30%
of world exports (including intra-EC trade), compared with a 25% average
in 1969-70.
13. Export restraints, particularly for the EC market, also contributed
to the drop in overseas shipments last year. Under the agreement with the
Community for 1972, shipments were limited to 1.25 million tons,
compared with 1.63 million tons the previous year - a 23% drop. In 1971,
in contrast, shipments had risen by 73%. Although export tonnage to the
Community did fall sharply in 1972, the Japanese probably overshipped
by at least 100,000 tons. Controls on shipments to the UK market were
initiated in 1 972, but these were either not very restrictive or were largely
disregarded, as export tonnage rose an estimated 20%.
14. Japan failed to meet the terms of the US restraint agreement
as well. Under the 1972 arrangement, quotas were set for all specialty
steels - stainless, tool, other alloy steels, and cold finished bars - but Japan
exceeded the limit in all categories except stainless. According to US data,
steel imports from Japan were within the agreements' limit of 5.9 million
tons. Japanese figures, however, show exports to the United States of 6.3
million tons, including some unusually large December shipments that did
not arrive until 1973. In any event, this was not the first time Japanese
data showed violations of the restraint program. Under the agreement
covering 1969-71, exports exceeded the cumulative three-year limit by
nearly one million tons. The restraint measures, nevertheless, have helped
to reduce Japanese annual steel exports to the United States by more than
one-half million tons since 1968.
IS. Restricted in expanding sales to the United States and the EC,
the Japanese have worked very successfully to develop alternative markets
for their steel. Markets not covered by restraint programs have, in effect,
accounted for all the growth in exports over the past several years. As
a result, only about one-fourth of Japan's steel shipments went to the US
market in 1971, compared with a little more than one-half in 1968 (see
the chart).
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16. Japan has made its
Japan: Distribution of Rolled Steel Exports greatest volume gains in near-
Ewapnn Community pl%) 0.2 11.2 Canada by markets, which took 7.3
Attics 03 l 1 ~% million tons of Japanese steel
Oceania
tviop,. M1 d?'' E"' END& in 1971 - twice as much as in
Latin Ame;,ca ' AX 1968 - and now absorb close
1968
Total: 13.2 Million Metric Tons
1971
Total: 24.2 Million Metric Tons
to one-third of total ship-
ments. The largest Asian mar-
ket for Japanese steel is the
People's Republic of China,
which now buys some two
million tons a year - more
than total shipments to the
EC. The most rapidly growing
Asian markets, however, have
been South Korea, Taiwan,
and Singapore, each of which
bought in the neighborhood of
one million tons in 1971, re-
flecting increases of 113%,
77%, and 212%, respectively,
above the 1968 level. Since
the mid-1960s, Asian coun-
tries as a group have consti-
tuted the world's fastest grow-
ing market for steel, and the
overwhelming share of their
imports comes from Japan.
Although exports to some
Asian nations slipped last year,
overall Japanese sales to the
area probably changed little.
17. While concentrating on Asia, the Japanese have made large gains
in other steel .markets as well. Shipments to the EC, other European
countries, Canada, the Middle East, Latin America, Africa, and Oceania all
rose sharply between 1968 and 1971, as the following tabulation shows:
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Percentage Change
1971 over 1968
Total
84
Asia
99
United States
-9
Canada
351
European Community
(of Six)
692
Other Europe
(including USSR)
468
Middle East
179
Latin America
276
Africa
277
Oceania
154
Shipments to some of these markets slipped last year, mainly because
Japan's supply situation tightened. Exports to Argentina, to take an extreme
case, rose by 135% in 1971, to about one million tons, but fell back to
500,000 tons in 1972. Japan nonetheless nearly maintained its share of
world exports at about 30%.
The 1971 Currency Revaluation and Japan's Competitive Position
18. Although tonnage in 1972 dropped by 10%, the value of Japan's
steel exports rose by 4%, to $3.8 billion. Earnings rose because Japanese
steelmakers steadily raised their dollar prices following the December 1971
Smithsonian agreement. When the yen was floated in August 1971 and began
to rise in value, the industry initially absorbed nearly all of the currency
change out of concern about maintaining export volume. Early in 1972,
with the supply situation changing, Japanese steel prices began mounting
fairly steadily, and by August most of the 1971 revaluation had been passed
forward in the form of higher dollar prices. The overall price rise from
the first half of 1971 to the first half of 1972 amounted to about 12%,
or roughly three-fourths of the revaluation.
19. Japan has not raised steel export prices uniformly for all markets.
For sales to the United States, for example, dollar prices averaged about
9% higher during the first half of 1972 than in the same period of 1971.
The below-average increase for the US market reflects the fact that prices
being charged by Japanese exporters already had been pegged just below
the US domestic level. There consequently was relatively little room to
hike prices without weakening Japan's competitive position. In other
markets, where Japan's prices had been kept relatively low, it was much
easier to raise them sharply without seriously hurting sales. Prices for sales
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to several Southeast Asian countries, for example, were raised by 20% or
more without sigAificant loss in Japan's market share.
20. Price changes fluctuated from product to product as well. For
US imports, the change in dollar prices varied from a 19% increase for
cold rolled sheets and strip to a 26% cut for tool steels (see Table 2).
Japan: Change in Prices for Steel Exports to the United States
US $ per Metric Ton
Percentage Change
1971
Jan-Jun 1972
Type of Steel
1970
1971
Jan Jun
1971
Jan-Jun
1972
over
1970
over
Jan-Jun 1971
Flat rolled steel
Hot rolled, uncoated
111
124
120
136
12
13
Hot rolled, coated
184
190
175
205
3
17
Cold rolled
133
146
142
169
10
19
Pipes and tubes
163
174
171
190
7
11
High-carbon rock
and wire
197
203
200
204
3
2
Alloy steels
Stainless steel
1,083
1,048
1,051
1,102
-3
5
Tool steel
851
1,486
1,885
1,400
75
-26
Other
249
260
243
269
4
11
Low-priced steels
Wire and rods
124
133
132
135
7
2
Bars and structurals
132
134
127
140
2
10
Other shapes
208
339
89
97
63
9
Average
173
183
179
196
6
9
Japan's prices for individual products apparently were set at levels designed
to keep them competitive not only with US prices but also with European
export prices. In the case of tool steels, for instance, US prices increased
by about 5% early in 1972, but Japanese prices were cut drastically because
of lower prices being charged by some European suppliers.
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21. Japanese steelmakers still have a clear competitive edge over US
and other major steel producers. Taking the December 1971 currency change
into account, the Japanese industry's average hourly labor costs (including
'.II fringe benefits and semi-annual cash bonuses) rose by 24%, to $2.50,2
from the first three quarters of 1971 to the same period in 1972. This
figure still contrasts sharply with the US steel industry's average hourly
labor cost of about $7.70 at the end of 1972. Because average labor input
per ton of steel is about the same in both industries, Japan's unit labor
cost is oaIy about one-third that of the United States. Japan's advantage
in unit labor costs over major West European producers is smaller but
remains substantial.
22. Initially at least, the 1971 currency revaluation reduced the cost
in yen of the Japanese steel industry's huge imports of raw materials because
suppliers generally were unable to renegotiate contracts stipulated in dollars.
The savings were appreciable because Japan's revaluation was the largest
and because Japan imports a much larger proportion of its raw materials
requirements than do other leading steel producers. Reduced costs in yen
for raw materials, fuel, and other inputs enabled Japanese producers to
moderate the rise in their dollar export prices without a serious profit
squeeze. In fact, industry profits increased by 38% in 1972, owing to much
improved domestic sales.
The Industry's Interest in Investment Abroad
23. Despite the industry's strong competitive position, Japanese
steelmakers see that the world steel market is changing and that their
position in it mist change. In the past, Japanese producers did well because
of the booming domestic economy plus relatively easy access to the US
market. When sales to the United States were curbed, they successfully
turned to other markets. Export opportunities, however, are more limited
now that Japan has captured a large share of many foreign markets. Also,
more of the developing countries are establishing their own steel industries,
and in some cases they hope to develop an export capability, which would
mean competing with the Tapanese. Meanwhile, Japan will continue to face
restrictions on shipments to the United States as well as the EC markets,
for which a new restraint agreement was recently negotiated.
24. Japanese producers are reacting to this situation by increasing
their investment ?broad. Several companies already have entered into joint
ventures with foreign steel producers. Nissan Steel Company, for example,
has built a stainless steel plant near Gibraltar jointly with Exdisa, Spain's
leading producer. Nippon Kokan and C. Itoh currently are trying to
2. Based on the exchange rate of 308 yen to US $1; at the current rate for the floating yen,
hourly costs equal about $2.90.
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negotiate a joint venture with a Greek company to build a $200-million
integrated steel plant in Greece. Japanese companies have already entered
or are negotiating joint ventures to build steel plants in Mexico, Brazil,
Indonesia, Malaysia, and Thailand. In other instances the Japanese are
supporting project, in which they will not have equity. Nippon Steel, for
example, is providing financing and technical assistance for the Pohang
complex, which is supposed to make South Korea self-sufficient in steel
later in the 1970s. Under the arrangement, the South Koreans are buying
large amounts of machinery and equipment from Nippon Steel, for which
Japan has provided a $164-million credit.
26. Tokyo's latest currency realignment will not seriously erode the
steel industry's strong international compet tive position. Because of its
relatively low wage rates, the industry still has a large cost advantage over
US producers. Moreover, its advantage over West German and Benelux
producers, the main EC exporters, will not decline much, because these
countries' currencies will be devalued only slightly relative to the yen. In
the matter of the domestic cost of imported materials, Japan again will
make out relatively better than the West European countries. Japanese
steelmakers recognize their strong position and recently projected that, even
with a substantial yen revaluation, steel export volume during the year
ending in March 1974 would increase significantly. Export value will be
up by a wide margin, as the companies pass forward part of the currency
change. Only nominal price increases can be expected on shipments to the
US market, however, since Japanese quotations generally are now only
slightly below US producer prices.
27. Prospects for a substantial increase in Japan's steel exports
through the mid-1970s are good in spite of continuing restrictions on sales
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to the US and EC markets. As in recent years, the main growth probably
will take place in Asian markets, where Japan has special advantages over
US and European producers because of its location. A huge market still
exists in this area despite expa.sion of domestic production facilities, and
Japanese suppliers are aiming for sales of 10 million to 12 million tons
annually by the mid-1970s. Japan also will certainly maintain, and may
even increase, its share of imports by other less developed countries, where
steel consumption will prow faster than the expected worldwide rate of
6% to 8% a year. Although Japan is likely to stay fairly close to the
restricted limits, exports to the United States probably will increase by
more than 5% and those to the EC by at least 25% by 1975. Total Japanese
exports, in terms of crude steel equivalent, accordingly are likely to reach
35 million to 40 million tons by 1975, compared with 29 million tons
in 1972.
28. With the domestic economy accelerating rapidly, Japanese steel
consumption is expected to continue growing at a fast pace. As in the
past, steel consumption probably will considerably outpace the growth of
real gross national product, which probably will increase at least 10%
annually during the next three years. As a result, steel consumption should
reach at least 100 million tons of crude steel equivalent in 1975. This
domestic demand plus the expected exports points to a 1975 output
requirement of about 140 million tons. which can easily be met by plant
expansion programs already on the books. Although such an output would
fall somewhat below earlier projections, it probably would approximate the
US and Soviet levels and might make Japan the world's leading producer.
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