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Review
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Steel industry mergers could lead to stabilization:
Consolidation in the steel industry is beginning to resemble that of the oil
business during the second half of the 1990s, according to analysts. But it
is not just the steel makers themselves that want to become less-fragmented;
some of the key suppliers of raw materials have already made moves toward
consolidation too, while others are in the process of following suit. As a
result of an earlier round of consolidation, the world's supply of iron ore
to the steel industries in Asia and Europe is dominated by just three
producers: two in Australia and one in Brazil.
If the proposed merger between the world's largest steel maker Mittal Steel
and the world's number two, Arcelor, succeeds, it would be the equivalent of
the merger of Exxon and Mobil that formed what is now the world's largest
oil major. For the first time in the steel business, it would create what
many analysts describe as a truly global player. They argue that the
combined entity would have the upper hand when negotiating with major
customers, such as the automotive industry. At the same time a combined
Mittal/Arcelor would also have significant bargaining power in iron ore
negotiations, especially as Mittal is already integrated with iron ore
production in some areas of the world. Analysts say that the pressure for
further consolidation in steel will be even greater if the merger goes
through. The end result would be higher and more stable steel prices and
stability of earnings among steel makers.
Since the Mittal/Arcelor merger was first proposed in January of this year,
it has emerged that Russian steel major Evraz is in talks with British-Dutch
steel group Corus that could lead to a merger and the creation of another
major player in Europe, even if it is not a global player. Corus, itself,
was the result of an earlier round of consolidation that emerged in the mid
1990s from the former state-owned British Steel merging with Dutch steel
maker Hoogovens. The mid-1990s also spawned the combination in Germany of
the Thyssen group with Krupp, to create ThyssenKrupp. This earlier round of
consolidation in Europe was the first step in the European industry of
moving away from being fragmented and was in reaction to a round of
consolidation that had already occurred in Asia.
In Japan, the emergence of JFE Steel in the last few years was the result of
a merger of Kawasaki Steel and NKK, creating the world's fifth largest steel
producer and Japan's second largest after Nippon Steel.
In the US, a recent round of consolidation has left the country with four
dominant steel producers, the largest of which are Nucor and Mittal Steel
USA. Mittal Steel was the result of Mittal buying International Steel Group.
This gave Mittal the largest share of the lucrative US automotive industry.
China has emerged in the last two years as the world's largest steel
producer, but steel is a highly fragmented industry with very few dominant
large producers. Shanghai Baosteel, ranked as the world's fifth largest
producer in 2005, is China's largest steel maker. Analysts say it is
inevitable that China will have to undergo a significant round of
consolidation. Part of this may also be forced by the closure of
inefficient, high-polluting blast furnaces that are close to large
population centers, to comply with environmental regulations that will force
some of the smallest producers out of business, according to analysts.
On the raw materials side, Canada's Inco and Falconbridge are in the process
of trying to merge in a deal that will create the world's largest nickel and
cobalt producer, the former being a key input into the production of
stainless steel. In Norway and the US, Elkem is rapidly exiting the
energy-intensive ferrosilicon and silicon metal producing business. In the
US, this resulted in the sale of a 65,000 mt/year silicon plant to Globe
Metallurgical in January, making Globe the largest producer of silicon in
North America.
In South Africa, there has been consolidation among ferrochrome producers.
Ferrochrome is another key input to the stainless steel industry. The
consolidation of ferrochrome producers in South Africa has enabled the South
African producers to push through price increases this year as stainless
steel production has recovered and as the value of the South African rand
has risen against the dollar.
And in April 2006 Russian steel maker Evraz has agreed to buy US vanadium
producer Stratcor in a deal worth $110 million. Vanadium is an important
input into carbon steel, especially in tool steels, and Evraz lacked its own
ability to produce vanadium. The company has said that it was interested in
a "strategic exposure of the company to attractive markets of high-valued
vanadium products."
Source: Platts
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