AHEAD of the GAME

In an era of de­mand re­newal, Aus­tralian steel com­pa­nies are poised to reap the ad­van­tages of a re­struc­ture, writes An­drew Troun­son

The Weekend Australian - Review - - Rear View -

IT IS be­ing called a new era for the global steel in­dus­try. The era when the in­dus­tri­al­i­sa­tion of China and In­dia drives mas­sive and sus­tained de­mand for steel, one of the core build­ing blocks of in­dus­tri­al­i­sa­tion. While steel con­sump­tion per per­son in the de­vel­oped west­ern world is in de­cline, it is start­ing to scale the ex­pected peaks for the bil­lions of peo­ple in China and In­dia.

It is no ac­ci­dent that China now ac­counts for over a third of world steel pro­duc­tion and that the owner of the world’s sin­gle big­gest steel com­pany, Mit­tal, is a bil­lion­aire from In­dia, Lak­shmi Mit­tal. By 2020, an­nual steel pro­duc­tion in China and In­dia com­bined will ex­ceed all the out­put from the de­vel­oped world. The sec­tor is now in the early stages of what is tipped to be an un­prece­dented frenzy of mergers and takeovers as steel com­pa­nies re­cy­cle their stronger earn­ings into buy­ing each other out. That is be­ing driven by the need to cut costs in the face of ris­ing raw ma­te­rial costs, and to con­sol­i­date out­put to head off a ten­dency to over­pro­duce.

In the global con­text Aus­tralia’s steel in­dus­try is mi­nus­cule. We make less than 8 mil­lion tonnes a year, or just 0.6 per cent of to­tal world pro­duc­tion. And our steel mar­ket is sim­i­larly tiny and ge­o­graph­i­cally iso­lated.

But Aus­tralia has ac­tu­ally been ahead of the con­sol­i­da­tion global game ex­actly be­cause it is rel­a­tively small. In the face of ris­ing costs and im­port com­pe­ti­tion, Aus­tralia’s steel pro­duc­ers this year agreed a ma­jor in­dus­try carveup that cre­ates a new long- term do­mes­tic struc­ture dom­i­nated by two strength­ened play­ers, BlueScope Steel and OneS­teel.

But while the long- term struc­ture of the in­dus­try in Aus­tralia ap­pears to be fi­nally set­tled, our in­dus­try could yet get swept up the wider global con­sol­i­da­tion game.

‘‘ I think the Aus­tralian steel in­dus­try will be largely set­tled, other than the pos­si­bil­ity that there are changes that are less about the Aus­tralian in­dus­try and more about the re­gion,’’ Ge­off Plum­mer, the head of Aus­tralia’s sec­ond largest steel com­pany, OneS­teel, tells The Aus­tralian.

Plum­mer and Kirby Adams, the head of Aus­tralia’s big­gest steel maker BlueScope Steel, this year agreed a $ 2.4 bil­lion carve- up be­tween them of third player, Mel­bournebased Smor­gon Steel.

The deal leaves BlueScope the dom­i­nant man­u­fac­turer of flat steel and its sheet steel build­ing prod­ucts, while OneS­teel will be the dom­i­nant pro­ducer of long steel prod­ucts such as tubes, re­in­forc­ing and bars.

Un­der the deal, which has been ap­proved by the Aus­tralian Com­pe­ti­tion and Con­sumer Com­mis­sion, BlueScope will ac­quire the Smor­gon dis­tri­bu­tion net­work, leav­ing do­mes­tic steel dis­tri­bu­tion largely split be­tween OneS­teel and BlueScope. OneS­teel mean­while ac­quires the rest of Smor­gon, in­clud­ing its steel mak­ing and man­u­fac­tur­ing op­er­a­tions.

The carve- up cre­ates a fine bal­ance of power be­tween the two play­ers, with OneS­teel be­com­ing BlueScope’s dom­i­nant do­mes­tic cus­tomer for its flat steel, but with BlueScope’s par­tic­i­pa­tion in long prod­uct dis­tri­bu­tion cre­at­ing a coun­ter­weight to OneS­teel’s po­si­tion.

The carve- up also sig­nif­i­cantly strength­ens the sec­tor to com­pete with im­ports from much larger Asian pro­duc­ers, com­pe­ti­tion from which the ACCC ex­pects will re­main strong.

As bro­ker­age Credit Suisse puts it, the deal cre­ates ‘‘ a more ra­tio­nal do­mes­tic steel in­dus­try struc­ture re­sult­ing in a re­duc­tion in mar­gin- de­stroy­ing be­hav­iour’’.

Be­fore the ad­vent of new Chi­nese steel de­mand, the global in­dus­try was char­ac­terised by over­ca­pac­ity. This was largely the re­sult of na­tions be­ing anx­ious to foster their own steel in­dus­tries amid con­cerns that main­tain­ing a steel in­dus­try was a na­tional se­cu­rity is­sue — a key source of ma­te­rial for bat­tle­ships, tanks and planes. As a re­sult there was lit­tle sup­ply dis­ci­pline.

In the years af­ter the sec­ond world war this wasn’t a prob­lem as post- war re­con­struc­tion drove steel de­mand. Steel an­a­lysts Laplace Con­seil call the 30- year pe­riod be­tween 1945 and 1975 the ‘‘ Glorious Thirty’’ as steel pro­duc­tion grew at more than an av­er­age 6 per cent a year.

But when the first and sec­ond oil crises hit, west­ern eco­nomic growth was brought to a stand­still. The fall in de­mand cre­ated a chronic over­ca­pac­ity in the in­dus­try that was ex­ac­er­bated in the 1990s when com­mu­nism col­lapsed in the USSR tak­ing the com­mu­nist- bloc’s de­mand down with it. Sud­denly the for­mer Soviet Union be­came the world’s largest steel ex­porter. For the steel in­dus­try this pe­riod 1975- 2000 was what Laplace Con­seil calls the ‘‘ Ugly Twenty- Five.’’

It was at the tail end of this ‘‘ ugly’’ phase that Aus­tralia’s then dom­i­nant steel gi­ant, BHP, de­cided to get out of steel and fo­cus on min­ing. In 1999 BHP shut down its New­cas­tle steel works and spun off first its long steel prod­ucts busi­ness as OneS­teel. It com­pleted its exit in 2002 with the spin off of BlueScope.

In the mid­dle of this up­heaval the Smor­gon fam­ily in 1999 floated their steel busi­ness and un­der chief ex­ec­u­tive Ray Hors­burgh went on an ac­qui­si­tion spree. But that ex­pan­sion push came to a halt when Smor­gon and OneS­teel faced off over Smor­gon’s bid to ac­quire steel dis­trib­u­tor Email, OneS­teel’s big­gest cus­tomer. Smor­gon’s bid for Email came ahead of BHP com­plet­ing the float of OneS­teel, and forced BHP to grab a block­ing stake in Email to pro­tect OneS­teel’s mar­ket ahead of the float. Af­ter months of hag­gling Smor­gon and OneS­teel agreed to split Email be­tween them in a prag­matic so­lu­tion that is now echoed in the planned break- up of Smor­gon be­tween the two BHP cast- offs.

BlueScope had sim­i­larly sought to stop the orig­i­nally pro­posed merger of its two big­gest cus­tomers, Smor­gon and OneS­teel, by buy­ing a block­ing stake in Smor­gon.

The pain of the ‘‘ Ugly Twenty- Five’’ is now fast dis­ap­pear­ing into the dis­tant past as global steel pro­duc­tion is now grow­ing at more than 6 per cent a year. By 2010, global steel pro­duc­tion is ex­pected to reach over 1.5 bil­lion tonnes, up from 1.2 bil­lion tonnes last year. And if his­tory is any guide, the strong de­mand growth isn’t ex­pected to end any time soon.

China’s steel con­sump­tion al­most dou­bled in the last four years to an es­ti­mated 396 mil­lion tonnes, as construction boomed to sup­port the mi­gra­tion of about 100 mil­lion peo­ple from ru­ral to ur­ban ar­eas. In the pe­riod to 2010, a fur­ther 60 mil­lion Chi­nese are ex­pected to move to cities.

Steel de­mand is linked closely to gross do­mes­tic prod­uct growth, and steel con­sump­tion per head of pop­u­la­tion is great­est at the early stages of eco­nomic in­dus­tri­al­i­sa­tion. In North Amer­ica, Europe and Ja­pan, the in­ten­sity of steel con­sump­tion has peaked when GDP per capita has reached around $ US13,000. The big­gest growth in con­sump­tion comes as GDP per capita grows to­wards

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