How strong is the entity?
Arcelor-Mittal Steel merger is being hailed as revolutionary. Are celebrations premature? Roger Manser probes.india Updated: Jun 28, 2006 03:48 IST
A hundred million-plus-tonnes-a-year tie-up later, both Arcelor and Mittal Steel are smiling. They hope that the deal will now serve as a catalyst for a wider spate of mergers and acquisitions. Mittal Steel executives believe the next ten years could see the formation of several companies, each producing 150 to 200 million tonnes a year. The result of global restructuring will be, according to the man in the spotlight, Lakshmi Mittal, “a healthier steel industry, capable of generating better returns through the cycle.
But hang on. Is this realistic? And what would it mean for a global industry, which, at one extreme, consists of small backyard induction furnaces producing rebar, and at the other, involves high-tech producers selling material at $ 5,000 per tonne or more?
The new alliance, if everything goes ahead smoothly, is likely to spur further consolidation. But by itself, this new grouping will not bring the industry the price stability and increased profitability it desires. To be successful, producers also need to segment their product range, increase transparency and bring in strong, effective management. The new Arcelor-Mittal grouping is clearly part of this long process. But its impact should not be over-played.
Research by PricewaterhouseCoopers into the financial results of the world’s 25 largest producers shows that consolidation has not, so far, brought the financial gains, that both Mittal Steel and Arcelor executives envisaged. In recent years, the most profitable steel companies seem to be those with access to abundant raw materials or a niche market. It is the large Russian companies with their own mines, and medium-sized firms focusing on smaller markets, which seem to be winning.
The two largest groups -- Mittal and Arcelor -- have not, to date, shown the promise that their supporters anticipated.
Steel is not steel. It is simply a collective name for an enormous range of alloys, some of a genuine commodity nature and some extremely specialised. Though the range is growing wider by the day, with new specialised products continuing to be developed, the industry’s own view of itself remains rooted in a commodity-based history.
The automotive industry could similarly be described, but many recognise that SUVs, for example, are quite a separate market. Such segmentation (even branding), together with appropriate pricing needs to become more widespread. In some steel sectors, such as quality plate and stainless, this is already occurring.
Stronger management is needed to ensure that output is kept continuously in line with market demand. In theory, this new consolidation should help, as both Arcelor and Mittal were leaders in maintaining a grip on production. However, whether the new entity will succeed in continuing this policy remains to be seen. Some think that it may actually be too unwieldy. The managers of the two companies may find it difficult to reach common commercial priorities. Yet, they will jointly need to make firm decisions on closures and expansions -- and as China shows, the latter is much easier than the former.
The steel industry landscape has changed -- and is continuing to change. But it still has a long way to go. Indeed, other factors have arguably been more influential of late than the consolidation that Mittal and Arcelor are now looking to achieve. These include the sustained growth in demand in many emerging markets, including China, as well as related factors, such as higher raw material costs, higher finished product prices, and greater involvement by the world’s financial institutions.
For producers looking to invest, price stability is key. For steel buyers, price and quality are both critical. However, one large producer with 10 per cent of the market -- mainly in Europe and North America -- is not expected, by most analysts, to reduce global price cyclicality to any great extent. This would take greater price transparency, clear product segmentation, and several massive producers with a global reach, together having a 50-60 per cent share of each individual product market.
Actual price and inventory levels remain opaque for virtually all products, in most regions of the world, contributing significantly to over-and under-stocking by producers, and hence to the extremes of the price cycle every few years. For some suppliers this lack of transparency is a means of controlling their market, and thus is to be continued at all costs.
However, new ventures, such as the Steel Index are challenging this dark pricing jungle. The Steel Index is run by Steel Business Briefing and tracks -- on a weekly basis -- actual transaction prices, as well as inventory changes. This information should help suppliers moderate the price excesses of the past. To assist this process, producers would also need to be significantly more open, detailing production, stock and price levels regularly.
Nevertheless, the formation of Arcelor-Mittal should bring definite competitive gains -- its proponents speak of $1.6 billion in synergies -- in marketing and trading, purchasing as well as in manufacturing. Other producers are likely to be forced to merge, but given the relatively small size of the next largest companies -- in the range 10-30 million tonnes a year -- this process could be long and difficult.
In Asia (and elsewhere), the influence of the State may also hinder such combinations. Many governments see steel as ‘strategic’, their own companies as ‘national champions’, and are thus reluctant to sanction foreign takeovers.
The formation of Arcelor-Mittal, if Arcelor’s shareholders agree, has been described by some as a paradigm shift, a step change in the industry. Others would rather see it as part of a process of gradual maturing, led by the growing influence of the world’s capital markets on the sector. Behind the latter stands China’s rapid growth, its appetite for raw materials, and its potential for export.
But the new group, if successful, should improve Arcelor’s raw materials’ availability, Mittal’s current distribution activities, and both companies’ supply chain from raw materials to buyer. Indeed, a stronger relationship between Arcelor-Mittal and its customers should help cushion the new company against the financial impact of the coming price downturn. Steel Business Briefing believes the cycle could start to impact on global prices within months.
The writer is Global Editor, Steel Business Briefing (www.steelbb.com), a daily global news service for the steel industry