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What do you think?
The steel industry has been through big changes over the past few years, driven largely by the surge in consumption and production in China and also by a spate of mergers and acquisitions that have given the big companies more power to set prices and dictate terms to customers.
The biggest merger was the €26.9bn takeover last year by Lakshmi Mittal’s Mittal Steel of Arcelor to form Arcelor Mittal, while following in the wake of this has been other deals, the most notable of which was last week’s acquisition of the Anglo Dutch Corus by Tata Steel of India for £6.7bn.
Following these changes, the scope for new merger deals by large steelmakers almost certainly will increase, while investors appear likely to continue their recent re-rating of the industry in terms of increasing their estimates for the industry’s future profitability.
Peter Marsh, the FT’s manufacturing editor and steel industry expert, answers your questions below.
We are a substantial consumer of many forms of plate steel and sectional steels, for use in the manufacture of construction equipment. Any recommendations for securing stable future supplies and pricing in the next couple of years?
Paul O Donnell, Northern Ireland
Peter Marsh: From my knowledge of the plate steel business there are not that many really good producers of this material around the world - and supplies have been difficult to secure in the past few years because of high demand .
If I were you I would certainly look at the possibilities of getting shipments from eastern Europe, India or China, as well as, of course, trying to have as decent relationship as you can with your existing suppliers.
What impact, if any, do you believe this industry consolidation will have on steel stockholders?
Jonathan Ruffell, London
Peter Marsh: I think it will be positive. There will still be lots of steelmakers for stockholders to deal with. I can’t really see any huge reduction in competition. The steel companies which survive will, on the whole, be more professional, well-financed and interested in giving a good service to their customers than in the past.
The fact that the latest airliner model is being built using a carbon composite material ten times stronger than steel and 75 per cent of the weight suggests that the market for steel product at the high value added end is diminishing, whilst begging the question as to who is actually making the product referred to?
Adrian Wield, Warwick UK
Peter Marsh: Indeed, there are lots of new applications for materials other than steel . A corollary is that steel is seeing competition from other materials in many fields - for instance packaging, cars and engineering. (But in aeroplanes, the main metal that the new composites may displace is aluminium.) We would expect to see new materials emerge continually and this can only be healthy. But this does not mean the new opportunities for high-tech forms of steel will diminish.
In fact there are probably more applications for such forms of steel than in the past . Think of the amount of high-tech steel used in fields such as bridges, gas pipelines and diesel engines where the technical specifications for the steel have risen considerably in the past 20 years.
What is your opinion on the Thyssen-Krupp/Arcelor-Mittal/Dofasco triangular lawsuit? What is the most likely outcome?
Maxim Perrin, London
Peter Marsh: I think we may have reached the end of the road on this. The legal judgment has gone against ThyssenKrupp which means it is unlikely the company will be able to buy Dofasco after all. That is unfortunate for ThyssenKrupp because it really liked the idea of adding Dofasco to its operations. For Arcelor Mittal the judgement. Dofasco is considered a good company and probably the managers at Arcelor Mittal quite like the idea that it will remain in their business.
What consequences will consolidation in steel manufacturing have on steel prices? What is your forecast on base metals prices?
Federico Donega’, Chennai, India
Peter Marsh: This year I think steel prices will go up - perhaps by 10 per cent. In 2008 they will stabilise. As for base metals, my feeling is that prices will stay fairly strong, given the decent condition of much of the global economy.
In global terms, are there any unique production characteristics that may justify higher company valuations? Is replacement value a factor you would consider important in analysing the steel sector?
Apostolos Constantinidis, Athens Greece
Peter Marsh: In assessing steel companies I would generally consider these factors as important: strength in relatively fast-growing steel sectors where technological prowess is crucial; management capabilities, particularly an interest in senior managers in increasing the international scope of their companies and taking in fresh thinking from other sectors; links with specific customer groups (such as construction or vehicles) whose demands are changing all the time and which veer towards the sophisticated; process technology; and profitability.
What are the chances of an emerging Brazilian champion, originated in a two or three way merger between Brazilian steel producers?
Jorge Grinberg, Montreal, Canada
Peter Marsh: I think this is very likely. Certainly the top executives of CSN, Usiminas and Gerdau must be deliberating on this point, even as we speak.
Much depends on whether they feel like giving up a certain autonomy by joining up with others. One intriguing possibility here is that CVRD - the Brazilian mining company and the world’ biggest producer of iron ore - could in theory at least form a “South American champion” in steel by brokering a merger of several Brazilian steel companies in which it would play the leading role.
Of course this would the resulting business a big advantage having so much iron ore at its disposal. Also CVRD is making a huge amount of money through high prices for iron ore and this might encourage it to make the appropriate cash outlays that would be needed. Against the idea, however, is that if CVRD became a big steel producer, this might damage its relationships with the steelmakers around the world who buy iron ore from the company. Also the senior executives of CVR may decide what they really know about is mining - not the complexities of making steel and finding buyers for it.
What are positives and negatives associated with this merger of Tata and Corus steel? What are the effect does it can give on presently and in likely near future towards the industry?
Peter Marsh: On the plus side, taking over Corus gives Tata Steel access to some highly interesting and sophisticated customers for steel in Europe, chiefly in industries such as construction, packaging, white goods and - to a lesser degree - automotive. Also Corus has some good process technology that Tata is keen to learn from . The company’s Scunthorpe plant in the UK is considered a leader, for instance, in making the steel sections of many different shapes and sizes needed in the construction sector.
Corus’s Dutch plant - in IJmuiden - is one of the most advanced plants in the world for making sheet steel in wafer-thin form , for instance for the car industry. Against this is that Corus - especially its UK plants - have for years struggled to make any money. Only in the past two or three years has the company been profitable.
Management actions to improve the performance of the plants (plus job cuts) have helped to make the company more efficient. But the biggest help in this direction has been the big rise in world steel prices . This has been a stroke of luck for Corus which has had nothing to do with its management actions. If you had said three years ago that someone was willing to spend more than £6bn buying Corus, people would have laughed at an idea that then would have been considered outrageous.
In pursuing this merger Tata is making a big gamble that by buying Corus it will be extending its operations considerably in the whole of Europe and that this will be beneficial not just to Tata Steel but to the other parts of the Tata group, for instance its vehicle and consultancy operations. It hopes the deal will help to implant a “global mindset” in its senior managers.
If the acquisition of Corus helps Tata become one of the few Asian companies outside Japan that is truly - and profitably - global, then the money Tata has paid for Corus will be considered a small price to pay.
How long will Blast Furnaces be used in the UK? I’m sure Tata will benefit from lots of ETS CO2 value for Phase two. The many hundreds of millions will help repay his debt.
Paul Garland, Lincolnshire
Peter Marsh: I think you make a good point . There is a good chance that in the next few years the UK will shut down its blast furnaces for good. I think probably 2012 would be too early. So let’s say that by 2020 this is likely to be the case. It will be a defining moment in the steel industry since it will show that the country which was the world’s first large steel producer (in 1850 Britain made 70 per cent of the world’s steel) has decided to exit from an important part of the business in so far as this involves making pig iron.
The UK could, of course, still play a role in the final processing of steel. It could take raw steel (made in “slab” form in other countries from a blast furnace-cum-converter process) and then perform the final processing operations (such as rolling) in smaller, less energy-intensive plants relatively close to the final consumers of the metal.
As you mention, the carbon dioxide emissions of the UK would fall as a result. (The C02 emitted from blast furnace operations account for a considerable amount of global output of this gas.) Of course the C02 would still be produced somewhere else in the world so the fact that the blast furnaces are no longer operated in Britain would not do much to change overall emissions.
The serious point here is that - in some cases - it can be worthwhile having blast furnace operations in high-cost countries where the expenses of running such operations are high . For instance, the Germany-based steel industry has some high-quality blast furnaces which are cost-effective to run, in spite of the costs of bringing in iron ore from further afield.
One reason why the UK’s blast furnaces may not turn out to be worth keeping in operation in the longer run is that Corus in the past 10 years has not invested sufficiently in keeping these plants at the very top level of performance. That, ultimately, may impinge against their chances of staying open. But whether this matters very much in terms of the overall economic health of the UK is very much open to question.
The FT has reported that China was the single largest source of foreign steel in the US in the second half of last year which has also led to claims of dumping of steel onto the US market. China has also been accused of distorting the steel market price by having anti-competitive subsidies for domestic suppliers. To what extent do you think these claims are true?
John Jose, London
Peter Marsh: I think you always have to be very careful before you place complete faith in the arguments of the lawyers who draft the complaints to governments about so-called “anti-competitive” prices of anything, whether this is steel or peanuts. How you work out the degree to which governments subsidise - or do not subsidise - industrial or agricultural producers is a very complex area.
Depending on your point of view, you can more or less prove anything with some carefully collated arguments and statistics. In the past few years, the US has been behind quite a few trade actions (several in the field of steel) which seek to argue that foreign producers are damaging the interests of US-based companies. Sometimes the arguments have been tenuous. In some cases, these actions have been little more than smokescreens to shield US-based producers from competition from abroad. I would want to examine very precisely the small print of the accusations that the Chinese are allegedly distorting the steel market in the US, before making a judgment that the claims are true.
I would like to know what is the estimated steelmaking capacity in China and world ex China, and what kind of expansion is expected in 2007 and 2008.
Irene L. Peters, CFA, Research Analyst, US Trust Company
Peter Marsh: May I point you for the answers to a website run by the London-based Iron and Steel Statistics Bureau. I am pretty sure you’ll find the answers there.
In my experience this is a very professional and well run website and the staff of the bureau I have always found to be unfailingly helpful. The International Iron and Steel Institute in Brussels also has a website with some useful statistics. But often when I try to look at this website I cannot get access to it and others I have spoken to have had the same experience. I am not sure if there is a problem with my computer or with the institute’s website. If others have had the same experience perhaps they would let the institute know.
Looking at the trends of M&A activities in the steel sector, which companies are a better fit for mergers? Do you think I have a bright chance to work with one of the top investment banks considering my engineering degree in mining engineering from India and MBA at University of St. Gallen, Switzerland.
Mukesh Kumar, St. Gallen, Switzerland
Peter Marsh: To answer the first question, the Russian companies Severstal and Evraz are perhaps the most likely steel companies to go down the route of international acquisitions. Severstal in particular has shown it can take over steel companies in other countries - notably the US and Italy - and operate them reasonably successfully.
I think Gerdau on Brazil may also be in a good position to look at acquiring a mid-sized steel company in Europe, to follow its efforts in this direction in the US. ThyssenKrupp of Germany has shown itself pretty hopeless so far at pulling off successful acquisitions outside Germany. But then it has not demonstrated that this is the route that it really wants to follow. It still has to show that it is serious about expanding into North or South America. The company may be better off continuing with its role of remaining primarily a Germany-based supplier, albeit with an intended operation making cheap and unprocessed “slab” steel in Brazil, and with sales activities across Europe.
To answer the second question, I would have thought you would have a very good chance to work for an investment bank with your credentials. But why go for the idea of a career in investment banking? It is, after all, at heart a pretty dull occupation. You would be better off to work for a steel company. Why not send off for an application form from Tata Steel (it will need more Europe-based employees) or Arcelor Mittal?
China imports much of its iron ore and coking coal, and labour costs are negligible in the steel industry. Yet it has become the world’s largest producer and a net exporter of flat products. Do you see its attempts to curb capacity and force consolidation internally becoming more aggressive? Do you foresee a takeover of a major Chinese producer by a foreign player such as Mittal or Posco?
Anton McGovern, Switzerland
Peter Marsh: The central Chinese government is making some efforts to force a certain amount of consolidation in the Chinese steel industry by brokering the formation of fewer, bigger companies . By going down this route, a lid will automatically be put on capacity increases. Also, as China becomes more serious about enforcing environmental controls, more of the country’s old (and polluting ) steel furnaces will be shut down, further braking any tendency for steelmaking capacity to rise.
Against these trends is the resolve (often not fully taken account of by western observers) by provincial governments in China to build up the capabilities of local steelmakers to act as a “provincial “ industrial champion. Such ideas can often run against the wish of the Beijing government to encourage consolidation. So the net result in the next few years may be a small amount of extra consolidation and curbs on capacity - but not necessarily all that much.
A much more interesting question is whether the Chinese government will allow a large western player to take over a large Chinese steel company. Arcelor Mittal has minority stakes in three Chinese steelmakers. It almost certainly would like to convert these stakes into a majority share in it least one (maybe two ) of them. Then Arcelor Mittal would consolidate all its Chinese operations into one large company: Arcelor Mittal China. Some Chinese government leaders are probably smart enough to realise going down this road would actually be good for China.
But others almost certainly will fight against the idea ,arguing China should not give up control of a “strategic “ industry to foreigners. Mr Mittal is playing a long game, trying to convince the top politicians in Beijing that his ideas make sense. Since he has shown in the past he is quite good at getting what he wants, I’d hesitate to bet against Mr Mittal winning the argument.
If the Japanese, Korean, European and US Steel companies do not consolidate sooner, how long will they survive?
Jaikishan Sharma, India
Peter Marsh: It all depends on how capable they are. A lot of companies in these countries have good technology, know their customers very well and have good production operations.
As long as the steel industry does not go into a big downturn (which is unlikely in the next two years) they will do OK. Those companies whose competencies in these areas are rather shaky - and Corus was a good example - may find it more of a struggle.
What is your view on the future of smaller, more specialised and focused players like, for example, SSAB of Sweden? It’s a remarkably profitable company, but is it even on the map for giants like Mittal?
Ola Hjelm, Hammarstrand, Sweden
Peter Marsh: SSAB is a very good company but is probably too small and specialised for Arcelor Mittal to want to buy, at least for now. Mr Mittal will want to concentrate on the near future on filling out his operations in the fastest expanding parts of the world economy, notably China.
In the next 10 years there will probably be an increasing split in the steel industry between the global giants and the small ,specialised players such as SSAB, with the latter group increasingly resembling “niche” companies selling particularly kinds of high-value components in the engineering industry.
What in your view are the next best options for CSN after Corus?
Olga Antonovskaya, London
Peter Marsh: Benjamin Steinbruch, the chief executive and main owner of CSN, must be thinking about this long and hard. Following the Corus experience he has now tried - and failed - on several occasions to expand CSN so it becomes more of a global producer, rather than one operating purely in South America (albeit with a very small presence in Europe and the US). Mr Steinbruch will undoubtedly be looking at opportunities for expansion in the US, following in the footsteps of Gerdau, another Brazilian steelmaker that has followed this route quite successfully.
But a better option for him might be to realise he is never going to make it into the big league of steelmakers and sell up to a large global company, or one with aspirations to go in this direction. He could probably sell CSN to Severstal or Evraz of Russia for a good sum and make enough money out of this to have a contented retirement.
Is there a case for investing in Russian steel companies?
Philip Owen, South Wales/Saratov, Russia
Peter Marsh: Russia’s consumption of steel is sure to rise, as you say. Several of the Russian steel companies have also made intelligent acquisitions abroad. On the face of it , some of these might be good companies to invest in . On the other hand, some may be worried about standards of corporate governance in Russian companies, many of which are only feeling their way on this issue.
There is also a concern, probably justified, by the possibility of undue political interference in the affairs of Russian companies, and these worries may be enough to put investors off.
I’m curious as to your thoughts regarding the likelihood of Russian, Brazilian or Indian entities acquiring Japanese or other Asian steel producers.
Mark L. Parr, managing director, KeyBanc Capital Markets
Peter Marsh: The problem of cultural compatibility looms large here. The Indian group Tata had the gumption to go after - and win - Corus not just because it felt it had access to the necessary funds. It also felt it was able to handle the complex managerial problems of operating a large Dutch/British company which is very much in the public eye, and may need to reduce its number of employees a lot in the not too distant future.
The Indian company clearly feels positive on this score and this strengthened the company’s resolve to raise its bid for Corus high enough to see off the challenge from the other bidder- CSN of Brazil. Many people from India feel a cultural affinity for historical reasons with Britain - where Corus has most of its plants and people - and this must surely help Tata assimilate Corus. Also Tata is a large group with plenty of international experience - at least in some divisions of the company, notably its TCS information technology consultancy.
Of course we will not know for some time whether Tata actually has the management acumen to run Corus successfully. As to whether Russian , Brazilian or Indian companies may feel able to acquire Japanese or other Asian producers, almost everything depends on the question of management competence and capability to come to terms with different styles of corporate behaviour and ways of doing things. In particular, the prospects of any company - from any part of the world - feeling they could take over running a large Japanese steelmaker and do it successfully are not very high.