Usinor, Arbed, Aceralia form world's largest steelmaker

By Staff -- Purchasing, 4/5/2001

Usinor of France, Arbed of Luxembourg, and Aceralia of Spain are merging in a $3.1 billion deal to create the world's largest steel producer. The new as-yet-unnamed company will be based in Luxembourg and will be able to produce 46 million metric tons/year of raw steel, eclipsing the output of last year's largest steelmaker, the 28 million metric tons of Japan's Nippon Steel. Still, the new company would represent just 6% of global production, signaling that more consolidation is likely in the fragmented world steel industry.

The companies plan to complete the deal this fall. The size and scope of the new company will be immense. Annual sales will total 30 billion euros ($27 billion). Half the sales will come from the carbon sheet and plate products with 13% from carbon steel bar and structural products; 17% from stainless steel; and 20% from distribution, trading and processing. Estimated annual savings from the merger will total 300 million euros ($270 million) at the end of 2003 and 700 million euros ($630 million) in 2006. Capital-expenditure savings will total 350 million euros ($315 million) in 2002-2005. "They have huge synergy potential," says analyst Klaus Soer at Deutsche Bank in Frankfurt.

Francis Mer, president of Usinor, and Joseph Kinsch, chairman of Arbed, will be the new company's co-chairmen. Fernand Wagner, Arbed's president and CEO, will be the new company's CEO. The proposed merger of the three European steelmakers is likely to be scrutinized carefully by the European Union's antitrust regulators. Antitrust officials will also take into consideration that "steel still is a fairly fragmented global market," says analyst Ken Hughes at Credit Lyonnais in London.

And, there is a precedent for such consolidation in Europe. In 1999, Corus Group of London was created by the merger of British Steel of the United Kingdom and Hoogovens of the Netherlands. Also, analyst Soer says "the Usinor/Arbed/Aceralia marriage fits in the landscape of the European steel industry, which has decided to reduce capacity. He expects Usinor to close four million metric tons of annual capacity in its upstream facilities in Belgium; Corus is shutting a total of five million metric tons of capacity, and Germany's Thyssen Krupp (created by an earlier merger) already is closing 2.5 million metric tons of capacity.

In the short term, the struggling U.S. steel industry should benefit as the newly combined European company reduces capacity by closing redundant operations. Last year, steel output worldwide grew several times faster than the demand increase of less than 2%, a situation that has kept prices and profits down both here and abroad. Moreover, a combined European producer is expected to ship less steel into the U.S. than three individual concerns, because it would have better control of overall shipments.

But, in the long term, a huge new steelmaker, with more efficient production, distribution and purchasing, will put further pressure on U.S. steelmakers, which are smaller, struggling with losses, and saddled with huge legacy costs that make it difficult for them to merge themselves and gain synergies. "I think U.S. steelmakers have to worry because this is a sign that worldwide, they are being left behind," says analyst Charles Bradford of Bradford Research in New York. Besides the European mergers, he adds, steel producers in Asia, facing low steel prices, have begun forming manufacturing and marketing alliances with traditional rivals.

There are many reasons companies merge, but basically it's a good way to raise the future value of the combined company through rationalization, synergies and market power, says analyst John Johnson at CRU International in London. Although the U.S. could benefit from consolidation, some of the barriers include the rise of mini-mills, union strength, environmental liabilities, protectionism and access to the world's biggest market.