The steel industry is consolidating. Some people believe the process is winding up. In fact, it is just beginning. The potential bid by India’s Tata for the Anglo-Dutch Corus is the latest example.
Mittal, Arcelor and Severstal fought the first battle in a global contest for supremacy. Mittal won. Casual observers saw its acquisition of Arcelor as an endgame, a “bottom of the ninth” inning scenario – to use a baseball metaphor. The combined group became the top steel producer in North America, Europe and South America, with three times the output of its biggest rival.
Arcelor Mittal’s ascendancy is deceptive, however. The group represents just 11 per cent of the world steel market. The top five steelmakers account for about a fifth. There is plenty of scope, and good reason, for more big deals. The consolidation game is far from over; we are only in the “bottom of the first” inning.
Within about five years there will be five to six steel giants – larger, more powerful companies with enough scale and resources to bring a new dimension of success to the industry. In time, the Mittal Arcelor deal may not loom as large.
The new steel industry will have a number of distinctive characteristics. The giants will own a more balanced portfolio of assets in developed and emerging markets, benefiting from the stability of the former and the low costs of the latter. The industry leaders will also be more self-sufficient. In the past, steelmakers have suffered from volatile markets in key raw materials such as iron ore and coking coal. They will look to overcome this vulnerability by securing their supplies.
New technologies will be embraced to make better quality steel, faster and cheaper. Producers will focus on higher grades – such as the steel used for cars – in order to differentiate themselves from commodity producers.
The handful of “superpowers” will each make in excess of 100m tonnes of steel a year and hail from around the globe. China will almost certainly be home to one big producer. Its steel industry is the world’s largest and accounts for more than a third of global output. The Chinese government is encouraging mergers between domestic producers.
The Russian steel industry, which has some of the world’s most efficient and profitable steelmakers, is also seeing internal consolidation. The eventual winners will surely compete on a global stage. Severstal and Evraz have offered us a glimpse of the future with their pursuit of several international deals, including Severstal’s recent attempt to merge with Arcelor.
Outside China and Russia there are key players such as US Steel and Nucor in North America, Nippon Steel and JFE in Japan, Posco in South Korea, ThyssenKrupp in western Europe, Tata Steel and Sail in India and Ternium, Gerdau, Usiminas and CSN in Latin America. Any or all of these companies could become a consolidator and create a formidable counterweight to Arcelor Mittal. Steel manufacturers must now decide if their company is a buyer or a seller.
What are the implications of consolidation? For consumers, raw material suppliers, steel manufacturers and investors, the outlook is mixed. With consolidation the price of steel will probably rise. Consumers will ultimately pay more.
Demand for the raw materials used to manufacture steel will soar. By 2015, demand for materials such as iron ore and coking coal is estimated to rise by 40 per cent, driven by the needs of India and China. As a result, shortages may develop. Supplying these materials could be lucrative.
Big steel producers will spend more on research and development. With advances in technology and manufacturing and fabrication processes, we will have better, higher quality products to support the container, packaging, construction and motor industries.
The victors in this process of consolidation will be far more efficient companies that are better able to control pricing. This will help to temper severe performance cycles the industry has traditionally experienced. Financial markets will see a more stable sector as a better investment.
Through the white heat of consolidation a great deal of business will be done and a great deal of money will be made. The challenge for those forging these steel giants is the economic and cultural complexity they will involve. Those that get it right will be richly rewarded.
The writer is managing director of Miller Mathis, a New York-based investment bank. Miller Mathis represented Severstal in the contest for Arcelor