It is interesting to see how hedge funds, private equity players and strategic shareholders are driving the consolidation in the steel industry. This has also got to do with the ownership structure in the industry, which favours consolidation.
Traditionally, steel was a national industry. So, British Steel or US steel were government-owned, either fully or partially. As developed countries achieved a level of comfort in steel, they began selling equity in these steel units. Communist countries, which lacked the capital market, started doing auctions.
In developed countries, what emerged was a disbursed body of shareholders. The companies did not have any large strategic shareholders, and were board-managed; they never took bold steps, which a strategic investor would take.
"The shareholding in such companies is disbursed, who are looking either to be a buyer or a seller of companies," said Kaushik Chatterjee, Tata Steel's CFO, after Tata Steel bagged Corus.
As a result of the equity sale, the nature of shareholding has also changed. Earlier, the steel companies (in developed countries) were owned by asset management companies (AMCs). Today, you hedge funds dominate, often forcing these companies to either sell out or buy so that they can make money.
The presence of such investors may not be good from a stability point of view, but they are there across companies, in US Steel or Corus, where there are large financial shareholders like Standard Life, Goldman Sachs or UBS.
But if consolidation has to happen, "It has to be driven by strategic investors who have the long-term view, who are willing to stay on and drive efficiencies of the operations, and who can take these calls," said Chatterjee.
Hedge funds, feels Chatterjee, are too focused on the capital market (short or medium term gains) to take these calls. The nature of ownership and the need for hedge funds to exit could see the emergence of a few strategic investors.