The Hindu Business Line : A year of consolidation for steel sector

Global mergers
Mittal Steel's takeover of Arcelor
Tata Steel and CSN eyeing for Corus of UK
Russia's Evraz's acquisition of US-based Oregon Steel
Baosteel's proposed takeover of Bayi Iron and Steel

Bangalore , Dec. 27

For the steel sector, year 2006 has proved to be an eventful and action-packed one. The year, which began with Mittal Steel's audacious takeover bid for Arcelor, is all set to close with the ongoing battle between Tata Steel and CSN for Corus of UK - reflecting the pace of consolidation.

The Arcelor-Mittal merger valued at $34 billion in June acted as a catalyst that set the wave of consolidation into motion. Following Mr Mittal's announcement of his plans to enter into Indian market, Tata Steel hiked the promoters' stake in the company to 33 per cent from 26 per cent; a defensive strategy to ensure that the management control remained with the Tata Group. Thereafter it was JSW Steel's turn to raise promoters' holding. These actions sent broad signals that Indian companies, irrespective of size, may not be immune to the emerging trend of global consolidation, especially those with ownership of low-cost manufacturing base.

Two key trends that highlights the action in this space are: One, steelmakers globally are finding the strategic logic dictating `consolidation' in the highly fragmented steel industry compelling. For Arcelor, it is an irony that a company created through a merger of French, Spain and Luxembourg steel producers, in the first major wave of steel consolidation in 2001, fell prey to that inexorable market force.

Russia's Evraz's acquisition of US-based Oregon Steel, Illinois-based Esmark's buyout of Virginia-based Wheeling Pittsburgh during the year and Baosteel's proposed takeover of Bayi Iron and Steel (one of the larger steelmakers in western China) all point to the compelling logic behind consolidation.

De-integration model

Two, the de-integration model (of making primary metal in low-cost countries and having finishing mills in growth markets) initiated by Tata Steel has found favour with several other domestic players. Jindal Stainless is learnt to be eyeing two cold-rolling facilities in South-East Asia and Europe after having one in Indonesia last year. Before the Tatas, JSW Steel was in talks with Corus for buying out some of its plants.

Combating cyclicality, calibrating supply to meet demand and pursuit for re-rating of steel stocks (traditionally steel stocks have sported lower price-to-earnings multiples than most industrial goods) are key variables that are likely to intensify the consolidation drive. Among the next five largest steelmakers, Posco has evinced interest in acquisitions in Asia, including China; ThyssenKrupp recently allocated over $10-billion for growth initiatives, including acquisitions; and Baosteel is pushing consolidation in the highly fragmented steel capacities in China.

For Indian steel players, despite their capacity expansion plans, their appetite for inorganic growth is rising. That they are going for a staggered capacity expansion this time around is unlikely to result in a glut, when capacities come on stream in 2009.

China, however remains a wild card. With over 25 per cent of global capacity, the country can destabilise prices by exporting steel to developed markets. China has turned a net exporter to the tune of 39 million tonnes for the first nine months this year.

Higher prices

However, as the US and Europe are likely to remain heavy users of steel at least over the next 3-5 years, prices are likely to remain at higher levels on an average. For the first nine months of 2006, imports by the US and Europe have risen by 46 per cent and 31 per cent respectively, while China's imports have declined by 32 per cent.

Steel prices, during the year have recorded a moderate rise. Current global prices are about 10-15 per cent above the prices prevailing during the corresponding period last year. Domestic prices have also moved in tandem with global prices. From a low of Rs 20,900 in December last year, prices of long products have moved up to about Rs 25,300 now.