Mergers and acquisitions proceed at a fast and furious pace
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.
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