Merg­ers and ac­qui­si­tions pro­ceed at a fast and fu­ri­ous pace

Keith Orchi­son

The Weekend Australian - Review - - Steel -

MERG­ERS and ac­qui­si­tions con­tinue at a high rate in the global steel in­dus­try, with man­age­ment con­sul­tants Price­wa­ter­house­Coop­ers es­ti­mat­ing that $ US60.9 bil­lion changed hands last year in deals.

The pace has ac­tu­ally slowed, say PwC, fall­ing back 23 per cent from its peak in 2006, but large pro­duc­ers from de­vel­op­ing coun­tries are busy buy­ing North Amer­i­can and Euro­pean steel­mak­ers as a means of mov­ing up the value chain and earn­ing higher profit mar­gins.

Mean­while, big pro­duc­ers based in North Amer­ica are swal­low­ing their smaller com­peti­tors in or­der to con­sol­i­date and to re­duce over- ca­pac­ity as US steel con­sump­tion slows down be­cause of eco­nomic weak­nesses cre­ated by the sub- prime mort­gage cri­sis.

Price­wa­ter­house­Coop­ers see the big deals con­tin­u­ing be­cause, they ob­serve, the world’s top five steel mak­ers still com­mand only 18 per cent of global pro­duc­tion, sub­stan­tially less than the mar­ket share en­joyed by their peers in the iron ore and alu­minium sec­tors — al­though other anal­y­sis also high­lights the fact that the top 15 steel mak­ers now ac­count for a third of global out­put com­pared with a quar­ter 10 years ago.

PwC point out that the mag­ni­tude of the BHP Bil­li­ton bid for Rio Tinto is such that, if it suc­ceeds, it will sin­gle- hand­edly break all pre­vi­ous steel sec­tor deal value records.

If BHP Bil­li­ton does ac­quire Rio Tinto, the pres­sure on the other ma­jor steel pro­duc­ers to grow their mar­ket share will be even higher, the con­sul­tants say.

A du­op­oly in the iron ore seaborne trade will put par­tic­u­lar pres­sure on non- in­te­grated steel mak­ers,’’ ar­gue PwC. ‘‘ In the short term, they may be able to pass any in­crease in raw ma­te­ri­als costs on to their cus­tomers, but in the longer term such an approach will be un­sus­tain­able.

‘‘ Many non- in­te­grated sup­pli­ers will be forced to ac­quire iron ore and coal as­sets in or­der to re­main com­pet­i­tive.

‘‘ Al­ter­na­tively, if ris­ing raw ma­te­ri­als costs con­tinue to boost fin­ished prices, the in­dus­try sec­tors that are most re­liant on steel may start us­ing other ma­te­ri­als, forc­ing some steel mak­ers, in turn, to di­ver­sify.’’

Both PwC and ri­val man­age­ment con­sul­tants Deloitte are em­pha­sis­ing that the scope of steel in­dus­try merg­ers and ac­qui­si­tions runs a grow­ing risk of at­tract­ing pro­tec­tion­ist gov­ern­ment mea­sures around the world, and par­tic­u­larly in the US and Europe, be­cause of po­lit­i­cal fears about com­pe­ti­tion re­duc­tion.

PwC’s 2007- 08 sur­vey of chief ex­ec­u­tive views in the world’s metal in­dus­tries shows that al­most half those in­ter­viewed now be­lieve the pro­tec­tion­ist ten­den­cies of gov­ern­ments rep­re­sent a threat to their prospects for busi­ness growth. On the other hand, the con­sul­tants say, met­als in­dus­tries’ CEOs are over­all more con­fi­dent about prospects than a year ago — prob­a­bly be­cause of greater pric­ing sta­bil­ity flow­ing from the past three years’ merger ac­tiv­ity.

Steel­mak­ers, and par­tic­u­larly those that are not self- suf­fi­cient in iron ore, are now more con­fi­dent that they can pass on ma­te­ri­als’ price in­creases to their cus­tomers.

Movers: Bid for Rio Tin­ter a record- maker

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.