RIO DE JANEIRO (Dow Jones)--Major steelworks in Japan, the world's second biggest steelmaking nation, were all back in production Tuesday following last Friday's earthquake, global steel information sources said. But their output is lower than usual due to electrical energy rationing, which may make it difficult for local mills to meet an expected surge in demand for steel for reconstruction once that starts, boosting prices, the sources said.
Japan's two biggest steel producers, Nippon Steel Corp. (5401.TO) and JFE Holdings Inc. (5411.TO), now report no major medium-term damage to their plants, said World Steel Association official Nicholas Walters in a telephone interview from Brussels. "The problem is energy rationing. At the moment the mills' ability to operate is affected only by the lack of energy."
Japan produced 109.6 million metric tons of crude steel in 2010, up 25.2% on 2009, according to World Steel. This was second only to China's massive output of 626.7 million tons of steel in 2010.
According to Walters, mills in the south of Japan are less affected by the energy-rationing measures than those in the north, which were fed by the nuclear power plants on Japan's northeast coast, the area most affected by the 9.0-magnitude earthquake.
Nuclear power plants in this region were taken out of operation after the massive earthquake resulted in reactor damage and radiation spills which the Japanese authorities are fighting to contain as a first priority.
Sumitomo Metal Industries Ltd. (5405.TO), which operates one of the major six steelworks in the Tokyo Bay area and was affected by the earthquake, Tuesday resumed production at its Kashima works after halting output when a gas coke oven caught fire after the earthquake, said Steve Randall, managing director of The Steel Index, a London-based steel and iron ore price provider.
However, a pause continues in steelmaking raw materials deliveries to the ports in the region, probably as a safety precaution, Randall said.
"There has been damage to pier cranes and port infrastructure, and a raw materials carrier was damaged at Kashima," Randall said. "There's been a hiatus in deliveries but not necessarily because the ports are unable to receive ore. It's a pause in operations without evidence of long-lasting damage to ports' infrastructure."
Brazilian miner Vale SA (VALE, VALE5.BR), the world's biggest iron ore producer, said it had no comment on the current status of its iron ore shipments to the major Japanese mills, with which it has long-term supply contracts. In 2010, Vale shipped 30.8 million tons of iron ore to Japan, up from 22.5 million tons in 2009, and representing 10.5% of its total iron ore sales.
A Vale press officer in Rio de Janeiro added the miner operates a nickel refinery in Japan that wasn't directly affected by the earthquake. The company's approximately 100 employees at its Japan office and refinery are all unharmed, she said.
Iron ore prices have nonetheless fallen since the Japan earthquake, mainly "on sentiment," Randall said.
"Prices are falling but they have been falling since Feb. 16-17," he said by telephone from London. Spot market prices for the iron ore ingredient peaked at $191.90 a ton on Feb. 16 to 17, but had already fallen to $170 a ton by March 10, immediately before the earthquake, as the Chinese had temporarily stopped buying due to their high stockpile levels, he said. Since then, the price has continued to fall, to $164.70 a ton.
In the short term, local steel demand in Japan will be lower as the country's carmakers have suspended production. However, the need for reconstruction of earthquake-devastated areas offers the steel industry an "upside," Randall said.
"There will be a surge in demand for building steel in the mid-term, representing opportunities for mills in the region, including the Chinese mills," The Steel Index director said.
Japan's own steel mills may not have sufficient production to fulfill a local demand increase if electrical energy-rationing measures persist, according to Randall. Japanese mills could stop exporting steel as a result, opening up new export markets to other players, he said.
"There will be a real spike in demand, over and above usual levels, in the medium to long term," Randall said.
Chinese mills' response to the Japanese crisis will probably determine how global steel prices move, according to The Steel Index director. If China exports steel to Japan for the reconstruction effort, then it could have less steel available for shipment to the U.S. and Europe, which would buoy global prices, he said.
