JFE to delay decision on $3.6 billion steel plant in Vietnam

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Steel bars piled up at a construction site in downtown Ho Chi Minh City.

JFE Holdings Inc. (5411), Japan's second- biggest steelmaker, will push back a decision on whether to build a $3.6 billion integrated steel mill in Vietnam, its first outside Japan, as it assesses competitive risks.

"We initially said a conclusion will be reached by the end of this year, but we'll need a bit more time," Eiji Hayashida, president of steel unit JFE Steel Corp., said in an interview Dec. 5 at the company's Tokyo headquarters. "Things won't go smoothly until we make sure that we'll beat the competition as many projects are being lined up to build new mills in southern China and Vietnam."

JFE's plan is part of a push to be closer to customers in markets where demand is surging for Japanese products such as cars. The company's challenge will be to cope with the high cost of setting up a plant at a time when China's slowing economy is causing a glut, said Shinya Yamada, an analyst with Credit Suisse Securities Japan Ltd.

"It's no use to go ahead with the project when the industry is struggling with excess steel supply," said Yamada, who has an outperform rating for JFE shares. "The risk is high."

JFE rose 1.3 percent to 1,298 yen in Tokyo yesterday, paring the stock's decline this year to 6.9 percent. The key Nikkei 225 Stock Average has gained 13 percent this year.

Feasibility study

JFE is studying whether to build integrated steelworks in Vietnam with Taiwan's E United Group (467), which secured a site in the Dung Quat Economic Zone of the nation's Quang Ngai Province, the Japanese company said in March. JFE will examine the feasibility of starting operations in 2016 with a capacity of 3.5 million metric tons a year, mainly of steel sheets, it said in the March 27 statement. JFE will control the operation.

"The region will grow in the long term," Hayashida said, referring to Southeast Asia. "We'll still need to carefully consider the timing," he said, adding that JFE will probably require five years to six years to develop the project.

JFE Steel is in talks with Vietnam's central and local government to secure infrastructure, including port, water and electricity supply to operate the works, Hayashida said. A decision on whether to move to the environmental assessment stage will be made by the end of March, he said. The company will push to lower the mill's costs, estimated at about 300 billion yen.

JFE Steel operates eight blast furnaces in Japan using iron ore and coal as the key raw materials to make steel. The company has yet to build a furnace outside Japan.

Scale back

JFE may scale back 1 trillion yen ($12 billion) of investments in the three years to March 2015 as earnings fall short of initial targets, Hayashida said. The company cut its full-year profit forecast by more than half to 35 billion yen on Oct. 24, six months after announcing the investment plan, which allocated a record amount to markets outside Japan where economic growth is fueling demand for steel.

To preserve its balance sheet, JFE won't sell new shares or increase debt for overseas expansion, Hayashida said. Instead, the company will curtail investments when earnings slump, he said. JFE Steel accounts for 84 percent of sales at JFE Holdings, which also owns units producing ships, power plants and handles trading.

JFE's push into Southeast Asia pits it against companies such as Taiwan's Formosa Plastics Corp. (1301) and China's Baoshan Iron & Steel Co.

Formosa Plastics, the diversified Taiwanese industrial company, plans to open its first blast furnace at its Vietnam mill in 2015 and add a second furnace in 2016 as the first phase of $9.9 billion in investments, Ha Tinh Steel Chairman Lin Hsin- I said in a Nov. 10 interview. Baoshan, China's biggest publicly traded steelmaker, plans to build a steel mill in Zhanjiang in southern China's Guangdong province.

JSW stake

JFE Steel paid 48 billion rupees ($886 million) in 2010 for a stake in India's JSW Steel Ltd. (JSTL) The Japanese steelmaker is currently the single-largest shareholder in JSW with a 16.2 percent holding, according to data compiled by Bloomberg.

Japanese steelmakers are looking for growth outside Japan, where steel consumption has dropped about 30 percent since peaking in 1990, according to data from the Japan Iron and Steel Federation.

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