Consolidation of the steel industry 0 comments

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The proposed acquisition of France's Arcelor Steel, the world's No.2 steel producer, by Mittal Steel, the No.1 steel producer, if materialised (subject to anti-trust approval I think) will probably signal a massive shift in power within the steel supply chain, in favour of a rapidly consolidating steel producing industry.

The world's three biggest iron ore producers, BHP Billiton,(BHP) CVRD & Rio Tinto (RTP), control about 75% of production of steel's major raw material and the top 3 car companies have about 30% of global sales. By contrast, Mittal, Arcelor and the next biggest steel maker have about 13% of the steel market. What this means, of course, is a disadvantaged situation where steel producers are squeezed by oligopolistic suppliers and customers at both ends. Economics 101 tells us that such a case of near-perfect competition produces minimal profits (known as normal profit).

One of the surest signs of inadequate pricing power and bargaining power is volatile earnings driven by supply and demand dynamics on either side of the producers. Indeed, steel prices fluctuate greatly, causing their producers to make massive profits during upswings and losses during down periods. This has been experienced by companies such as HG Metal, which experienced the former over 2004 to mid-05 and then the latter after mid-05. Such change of fortune over 2 years.

Consolidation in the US has been proceeding since the early 2000s, driven by United Steelworkers (a union) which also managed to lobby George Bush to adopt protectionist policies for the local steel industry. Nearly 20 mergers or acquisitions in the steel industry were negotiated involving ~30% of domestic steel-making capacity: eg. U.S. Steel purchasing National Steel to combine 2 of the USA's 4 largest producers.

Steel-making used to be seen as a strategic industry and a symbol of a nation's industrial strength, such as US Steel in the early 20th century. However, such thinking has become backdated and governments are no longer averse to outsiders acquiring their steel plants. Some might remember Natsteel has recently sold its steel operations to Tata Steel. Such a change in view has in turn facilitated a global consolidation as that championed by Mittal Steel over the last few years, in addition to the intra-national consolidations such as that within the US mentioned above.

Mittal which grew from a local steel plant in Calcutta to the world's No. 1 producer by acquiring distressed steel plants all over the world, across Europe, Central Asia and North America (the largest so far being International Steel Group, itself hitherto a major consolidator in the US as mentioned above). The timing of their consolidation process was truly outstanding, for it was in time to catch the massive wave of global (especially China) demand for steel in 2004-05 that catapulted Lakshmi Mittal to the world's 3rd richest man.

The trend for the major steel producers is to seek low-cost producers in new markets, or acquisitions which consolidate their positions in existing markets. That is why Mittal is seeking to acquire Arcelor: Mittal's footprint is mainly in the US and Asia, while Arcelor's stronghold is Europe, hence their operations complement each other.

Surely the next region for steel industry consolidation would be China. The steel industry in China has burgeoned these few years and made China a net crude steel exporter over the space of two years (hence causing steel prices to collapse). If the aim is to organise the steel industry into an oligopoly of producers and create an equal playing field with the ore producers and major steel consumers, China's steel industry would be one for major consolidation. The problem, of course, will be regulatory restrictions from their central government. There has been some attention over Delong Steel as a result of Mittal's Arcelor bid but indeed betting on they being a target of such consolidation is a shot in the dark: there are many more bigger steel producers in China which would interest the big players much more.

References:
(1) USWA: Steel Industry Consolidation
(2) Mittal-Arcelor Deal would create steel powerhouse

(3) Industry Consolidation Promises Stable Steel Prices
(4) New #1 in steel