Long-term industry viability requires more consolidation

Staff -- Purchasing, 10/6/2005

To remain competitive, the global steel sector must continue to consolidate until it is comprised of a small group of companies each producing about 80 million to 100 million metric tons annually. So says PricewaterhouseCoopers in its new Global Merger & Acquisitions Report for 2005. In it, the formation of Mittal Steel is presented as a way for the industry to kickstart this process.

Worldwide demand for steel is healthy, and has risen substantially over the past 13 years, largely because the Chinese market is growing very quickly. China is projected to consume about 350 million metric tons of steel this year, compared with less than 100 million metric tons in 1992, according to PwC. Interestingly, the North American steel sector has expanded its flat-rolled capacity by more than 16 million metric tons since 1995, "although more than 30 U.S. and Canadian steelmakers have filed for bankruptcy protection since 1997," the PwC report says.

The steel sector dominated the mergers and acquisitions industry last year, with 117 transactions collectively worth $31.4 billion, including the year's biggest deal—the $13.3 billion merger of LNM Holdings and Ispat International and subsequent $4.5 billion acquisition of International Steel Group, to form Mittal Steel, the world's largest steelmaker. According to AME Mineral Economics, Mittal is expected to produce 61 million metric tons of steel this year, 73% more than in 2003.

Overall, cross-border expansion continues to be a factor in steel sector M&A since, in 2004, there were 21 cross-continent deals collectively worth nearly $7.8 billion, compared with 18 such deals collectively worth just $1.7 billion the previous year. PwC notes that the trend toward cross-continental acquisitions reflects the fact that some of the largest steelmakers have turned to the emerging markets of Central and Eastern Europe, Asia Pacific and Latin America.

In 2004, these three regions jointly accounted for 43% of the total number of deals that were struck, and 31% of the total value that was traded. They also featured prominently in the list of top-10 transactions. LNM Holdings bought Polskie Huty Stal for $1.1 billion; three Russian companies were involved in deals worth another $3.8 billion; two companies based in China and South Korea completed deals worth $2.9 billion; and Arcelor spent $1.5 billion increasing its stake in Brazilian Companhia Siderurgica de Tubarao.

But despite the unprecedented level of activity in the steel sector, the world's top-five steelmakers still have less than 20% of the market—half the share enjoyed by the top-five aluminum producers, the report says. "The steel sector is also much more fragmented than other industries at both ends of the supply chain, so consolidation will be a key driver of future deals in the sector," adds PwC.