Global steel M&A still hot as input costs pinch

Consolidation through mergers and acquisitions (M&A) in the global steel industry is far from over. Steel manufacturers are looking at both vertical integration to buy raw material facilities and "horizontal" purchases to indirectly buy raw material units by courting finished goods makers that have them, industry reports and analysts say.

According to the International Iron and Steel Institute (IISI), in 2005, the top world's 15 producers produced 350 million tonnes of crude steel which accounted for one-third of the world's production of 1.05 billion tonnes. In 1995, the top 15 players produced 225 million tonnes of the total global production of around 800 million tonnes, or a little over a quarter.

If Tata Steel's aim to acquire Anglo-Dutch Corus group were completed successfully, the top 15 steel makers would account for 400 million tonnes.

"The consolidation will allow the steel producers to have a greater control over the demand - supply balance and ensure stability in steel prices," Manish Joshi, analyst with Karvy Stock Broking, told Hindustan Times.

In fact, Arcelor-Mittal closed two of its units in Europe citing annual maintenance needs, but industry analysts saw in this the accompanying gain of controlling inventory levels in the continent. The shut-down is expected to help Laxmi Mittal's post-merger global leader, Arcelor-Mittal, which has control over 10 per cent of the global capacity, in controlling European steel prices, said a senior official of a leading Indian steel maker.

Rising input costs are forcing steel mills to become integrated manufacturers, experts say. The raw material costs, which include charges towards iron ore, limestone and fuel, shot up to $250 per tonne in 2005 from only $80 per tonne in 2001. In case labour and other costs are included, the current actual cost goes up to $400 per tonne. "Therefore, whenever the HR (hot rolled) coil price goes below $400 per tonne, players that are not integrated will suffer losses," said an official working for a competitor of the Tatas, who did not want to be identified.

In 2001, HR coil prices had dipped below $200 per tonne, and most producers were going through tough times. In December 2004, that had tripled to touch $600 per tonne. Experts say the global prices are now ruling around an average of $500 per tonne. With input prices putting profitability in a precarious position, industry leaders are forced to pursue consolidation and integration with an eye on raw material costs, industry officials say.

In India, state-owned Steel Authority and private sector leader Tata Steel are the only integrated players who produce everything from iron ore to finished steel. Since they have captive iron ores mines, even if HR coil prices go below $400 per tonne, their profitability is expected to remain strong.

While the proposed acquisition of Corus by Tata Steel is still hanging fire after Brazilian CSN threw in its hat as a rival bidder. Experts say that whoever acquires Corus will certainly become a significant global steel player.

Email Arun Kumar: arunkumar@hindustantimes.com