Sumitomo taking scalpel to core business in step toward reform
Nikkei recently reporte that although Sumitomo Corp's mainstay metal products business has long been self-reliant, the trading house is being forced to re evaluate that stance after logging its first net loss in 16 years last fiscal year.
The announcement Monday of plans to merge Sumitomo's domestic steel construction products business with that of Marubeni-Itochu Steel is a breakthrough for the company, which is trying to distribute resources more selectively in hopes of engineering a recovery. Marubeni-Itochu Techno Steel, a unit of Marubeni-Itochu Steel, will absorb Sumitomo subsidiary Sumisho Tekko Hanbai. A new company, Marubeni Itochu Sumisho Techno Steel, is slated to be set up in January 2016, with Sumitomo holding a 33.3% stake. In a separate deal, Sumitomo will hand over steel scrap sales operations to an Itochu subsidiary.
The metal products business, centering on a relationship with the former Sumitomo Metal Industries, has long been a Sumitomo mainstay. Although current President Kuniharu Nakamura hails from the motor vehicle business, a number of his predecessors came through the metal products segment, including Susumu Kato, Motoyuki Oka and Kenji Miyahara. The segment is still an important part of the company, expected to account for 10% of group net profit in fiscal 2015. But it has been clearly left in the dust in the construction materials business.
Mitsubishi Corp affiliate Metal One Structural Steel & Resource merged with Mitsui & Co Steel in the autumn of 2014 to form Metal One Mitsui Bussan Resources & Structural Steel. The new company has annual turnover of roughly 920 billion yen ($7.35 billion), well beyond Sumitomo's 100 billion yen. Sumitomo still has an edge to some extent in the greater Osaka region, but "it doesn't have much clout nationwide," a steel industry source said.
Marubeni-Itochu Steel, whose annual construction-materials-related turnover totals some 300 billion yen, was apparently approached by Sumitomo about the merger. Given Sumitomo's close relationship with Nippon Steel & Sumitomo Metal, the fact that it was forced to cozy up to Marubeni-Itochu Steel, a close partner of Nippon Steel rival JFE Steel, shows just how tough a spot it was in.
Sumitomo's medium-term plan starting this fiscal year calls for strengthening nonresource businesses, including automotive and infrastructure operations, according to Nakamura. In the metal products segment, the company will look to widen margins on items -- such as thin steel sheet and aluminum -- that are expected to be in higher demand as automakers make lighter vehicles. Sumitomo aims to stop worrying about offering a full array of steel products in-house, starting in the construction materials business, sending a message that it is making changes throughout the company.
The company booked roughly 270 billion yen in write-downs for fiscal 2014 on shale gas and other operations, including losses on shale gas development in North America due to dropping crude oil prices. It urgently needed to offload resource concessions to put its financial house in order. Sumitomo has sold its stake in an Australian coal mine amid a market slump and halted new development on another U.S. shale gas project. It will freeze major resource-related investment for the time being.
Source : Nikkei