Merger and acquisition activity in the metals sector plunged 30 per cent in 2013 to an eight-year low, as slow global growth, falling prices and production overcapacity made it hard for buyers and sellers to agree on valuations.

As the commodities markets slumped last year, just 357 M&A metals deals were completed, compared to 507 in 2012, according to a report by PwC.

The value of the deals decreased 24 per cent from 2012 to $34.8bn. To put that into perspective, in 2007, the height of the China-driven commodities boom, the value of deals totalled $144.7bn.

The average base metals and precious metals prices for 2013 dropping 6 per cent and 17 per cent respectively, according to the World Bank.

“Deal activity fell away in 2013 and, while there is some greater economic optimism, we conclude that overall low gear growth combined with continued worldwide production overcapacity doesn’t augur well for a strong recovery in metals M&A in 2014,” said Jim Forbes, global metals leader at PwC.

Domestic metals deals dominated last year, with the value of cross-border M&A activity falling from 39 per cent to 11 per cent of the total value, by far the lowest figure since data were first collected for the report in 2003.

While seven of the ten biggest completed transactions were worth more than $1bn, only two were initiated in 2013, with the rest carried forward from previous years. The largest completed deal was the $7.5bn merger between two Middle East state aluminium firms to create Emirates Global Aluminium.

In 2014, companies are still more likely to use funds to reduce inefficiencies and costs and to spur innovation, rather than to seek acquisitions, the report said. But PwC said the dealmaking mood in the metals industry was “brightening a little” in 2014, as commodity prices stabilised.

The Chinese government’s five-year plan to tackle overcapacity and pollution could encourage some consolidation activity between companies there, the report said. Additional purchases of iron ore assets by Asian companies are also expected, as are more joint venture deals globally.

The biggest shift in M&A trends could be geographical, with momentum moving back towards advanced countries, in particular the US. The improved American economy, along with the advent of shale gas and expectations of lower energy costs, is stimulating interest from foreign companies in doing metals deals there. Already in 2014, ArcelorMittal and Marubeni-Itochu Steel have bought US-based businesses.

Raj Karia, partner at law firm Norton Rose Fulbright, said prospective buyers and sellers in the metals industry were having to “adjust to the new realities of life”.

“M&A activity in the resources space has been negatively impacted by the mismatch in seller and buyer expectations about the trajectory of the underlying commodity prices,” he said. “This is creating a gap in valuation expectations, which will narrow over time.”

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