swords to cores

March 13 (Bloomberg) -- From a windswept corner of Hokkaido, Japan's northernmost island, Japan Steel Works Ltd. controls the fate of the global nuclear-energy renaissance.

There stands the only plant in the world, a survivor of Allied bombing in World War II, capable of producing the central part of a nuclear reactor's containment vessel in a single piece, reducing the risk of a radiation leak.

Utilities that won't need the equipment for years are making $100 million down payments now on components Japan Steel makes from 600-ton ingots. Each year the Tokyo-based company can turn out just four of the steel forgings that contain the radioactivity in a nuclear reactor. Even after it doubles capacity in the next two years, there won't be enough production to meet building plans.

``If there are 50 to 100 reactors or more to be built, there will be a real shortage and real delays in deliveries, so it's a good hedge to get in line now,'' said Ron Pitts, senior vice president for nuclear operations at the construction and engineering company Fluor Corp. in Irving, Texas.

Pitts estimated the cost of heavy forgings, including reactor containment vessels, steam generators and pressurizers, at $300 million to $350 million for each generating unit. Japan Steel wouldn't comment on the size of the down payment, which Pitts estimated at $100 million.

Right Now

UniStar Nuclear Energy LLC in Baltimore, a venture between Constellation Energy Group and Electricite de France SA, reserved slots for Japan Steel gear in 2006, even though it doesn't expect to complete its first reactor until 2015. It plans to build reactors based on technology from Areva SA of France.

``You need metal on the ground right now to make 2015,'' said Ray Ganthner, senior vice president of new plant deployment at Areva NP Inc. in Lynchburg, Virginia.

Orders for nuclear generators are multiplying as electricity use surges worldwide and governments pressure companies to cut carbon emissions to fight global warming. As many as 237 reactors may be built globally by 2030, an average of more than 10 a year, according to the World Nuclear Association in London. That compares with 78, or fewer than four a year, started since the 1986 Chernobyl meltdown in Ukraine.

Given Japan Steel's limited capacity, the math just doesn't work, said Mycle Schneider, an independent nuclear industry consultant near Paris. Japan Steel caters to all nuclear reactor makers except in Russia, which makes its own heavy forgings.

Competitors' Moves

``I find it just amazing that so many people jumped on the bandwagon of this renaissance without ever looking at the industrial side of it,'' Schneider said.

It would take any competitor more than five years to catch up with Japan Steel's technology, said the company's chief executive officer, Masahisa Nagata.

Rivals are working to break the Japan Steel stranglehold, including South Korea's Doosan Heavy Industries & Construction Co. and Japan Casting & Forging Corp., a joint venture of Nippon Steel Corp. and Mitsubishi Steel Manufacturing Co.

Doosan may make the heavy forgings for the second of Westinghouse Electric Co.'s reactors being built in China, while subcontracting those needed for the first reactor to China First Heavy Industries, said Dan Lipman, senior vice president for nuclear power plants at Westinghouse. Doosan and China First Heavy Industries may ``potentially'' be able to produce them in the future, Lipman said in an e-mail.

Areva, the world's biggest reactor builder, is considering modifying its newest design to be able to make the central reactor-vessel part from a 350-ton ingot instead of more than 500 tons as required today, said Pascal Van Dorsselaer, manager of an Areva plant in France's Burgundy wine region.

`Definitely a Bottleneck'

Areva would be able to produce the ingot itself with an investment of about 100 million euros ($155 million), he said as workers coated the inside of a Japan Steel reactor shell part with stainless steel to prevent rust.

``There is definitely a bottleneck,'' Van Dorsselaer said. ``It's a real issue for us.''

Another alternative is to turn back the technological clock and weld together two smaller forgings, said John Fees, CEO of McDermott International Inc.'s Babcock & Wilcox Co., which built the Three Mile Island reactor. That technique was used over the past 40 years in the U.S. and France and is still applied in China.

``It shouldn't be off the table,'' he said at Babcock's headquarters, also in Lynchburg, Virginia.

Even with the appetite for its nuclear products, Japan Steel is cautious about expanding too rapidly. Orders plummeted after a German coalition government including the Green Party pledged in 1998 to phase out nuclear power. Japan Steel was unprofitable for three straight years.

`Concern Is the U.S.'

The company will decide by June whether to further expand production, said Ikuo Sato, a manager of the Muroran plant on Hokkaido.

``Our concern is the U.S.,'' Sato said. President George W. Bush's ``administration is aggressive in building nuclear plants, but we wonder how many plants will actually be built.''

On Feb. 13, NRG Energy Inc., the second-largest Texas power producer, put its application for two new reactors on hold while it works out pricing and other details with suppliers. It has already reserved forging slots at Japan Steel for the plant.

``We want to make sure it's done exactly right and we have the right roles for our vendors and the right costs,'' NRG Energy spokesman David Knox said.

Blackened by Soot

Japan Steel stock more than doubled from the start of last year to 2,080 yen in July, before dropping, partly because of a plan to issue shares in case of a hostile takeover bid. They now trade at 1,602 yen, valuing the company at 595 billion yen ($5.8 billion). Hiroshi Chano, who helps manage $7.3 billion at Yasuda Asset Management Co. in Tokyo, sold his shares in July.

``Nuclear demand seems like it won't grow as expected because of safety concerns and a slowing U.S. economy,'' Chano said.

The Japan Steel factory's rusting, corrugated-metal warehouses, blackened by soot, belie the precision and patience required to fashion a 600-ton steel ingot into a tube with walls 30 centimeters (12 inches) thick. Blue-clad workers, some wearing balaclavas to keep warm, draw on knowledge built up when Japan Steel made the 18-inch gun barrel -- the world's largest at the time -- for the World War II battleship Yamato. A 1945 attack on the Muroran plant killed more than 200 workers.

``Our accumulated technology for cannon barrels helped us make this technical breakthrough in forging,'' plant manager Sato said.

The company's basic product, steel of the highest quality, has the same enduring appeal as the samurai swords still fashioned in limited quantities by craftsmen at the plant.

15,000 Tons

To make the 600-ton ingot, workers heat steel scrap in an electric furnace to as high as 2,000 degrees Celsius (3,600 degrees Fahrenheit). Then they fill each of five giant ladles with 120 tons of the orange-hot molten metal. Argon gas is injected to eliminate impurities, and manganese, chromium and nickel are added to make the steel harder.

The mixture is poured into a blackened casing to form ingots 4.2 meters wide in the rough shape of a cylinder. Five times over three weeks, the ingots are pressed, reheated and re-pressed under 15,000 tons applied by a machine that rotates them gradually, making the floor tremble as it works.

The heavy forging is needed to make the steel uniformly strong by aligning the crystal lattices of atoms that make up the metal, known as the grain. In a casting, they would be jumbled.

`More Art Than Science'

``What they do is an art more than a science, and that's why they're the critical path,'' said Steven Hucik, senior vice president for nuclear plant projects at GE Hitachi Nuclear Energy in Wilmington, North Carolina. His company has already reserved sufficient capacity at Japan Steel's plant to cover its first wave of new reactors, he said.

Japan Steel's most prized products also include samurai swords, with price tags of about 1 million yen.

They're made in a traditional Japanese wooden hut, up a steep hill from the rest of the Muroran factory. It's decorated with white zigzag papers called ``shide'' used in Shinto shrines, creating a sense of sanctity in the workshop.

Inside, as the factory clangs and hisses below, Tanetada Horii hand-forges broad swords from 1 kilogram (2.2 pound) lumps of Tamahagane steel.

``Making a sword emanating peculiar beauty from the dull substance of stone-like Tamahagane steel is bliss,'' he said.

CEO Nagata says the process goes to the company's heart.

``Samurai swords contain the essence of steelmaking technology,'' he said. ``We've inherited this technology and we don't want it to spill outside of Japan.''