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
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