Mittal’s steely resolve

For typical iron ore producers, the past few years’ fragmentation of its customers — the steelmakers — has placed the miners in a better position to raise prices and fatten their bottom lines.

But last year, the steelmakers started to fight back through a dizzying flurry of mergers and acquisitions that stretch across the globe and show no signs of slowing down.

In its inaugural annual report titled Forging Ahead — Mergers and Aquisitions in the Global Metals Industry, PricewaterhouseCoopers (PwC) has tallied up the mergers and acquisitions in 2004 in the steel, aluminum and base metals industry, and pointed to fundamental changes afoot in the steel sector.

In dollar terms, 2004 was a record year for M&A activity in the steel, aluminum and base metals sectors. According to PwC, in 2004 there were 166 disclosed deals in these sectors worth a total US$37 billion, compared with US$16 billion in 164 deals in 2003.

Of the 2004 total, the steel sector accounted for a whopping US$31 billion and 117 transactions. This included the year’s blockbuster: the creation of the world’s biggest steelmaker, Netherlands-based Mittal Steel, via the US$13.3-billion merger of LNM Holdings and Ispat International, and the subsequent US$4.5-billion acquisition of America’s International Steel Group.

Prior to the Mittal deal, LNM Holdings had already become the largest steelmaker in Eastern Europe with its acquisitions of Polskie Huty Stal, BH Steel Zeljezara Zenica, Petrotub Roman and Siderurgica Hunedoara.

Just as importantly, the impetus for much of the M&A activity in the steel sector has changed in recent years from local consolidation of bankrupt steelmakers (30 steelmakers in the U.S. and Canada, for example, have applied for bankruptcy protection since 1997) to today’s cross-border expansion. In 2004, there were 21 cross-continent deals in the steel sector worth a combined US$7.8 billion, compared with 18 deals worth US$1.7 billion a year earlier.

As Mittal Chairman and CEO Lakshmi Mittal comments in his company’s latest annual report: “Historically the steel industry was mostly state-owned, production driven and local in its thinking and behaviour. Compare this with the situation you find today and there is no question that the structure is changing.”

Mittal Steel is due to produce an astounding 61 million tonnes of steel this year, easily outpacing its nearest four rivals: Arcelor, 48 million tonnes; Nippon Steel, 32 million tonnes; JFE Steel, 31 million tonnes; and Posco, 31 million tonnes.

As well, Mittal has secured a good supply of raw materials, including coal, coke and iron ore, and increased its presence both in industrialized economies like North America and Europe, and in high-growth emerging economies like Eastern Europe and China.

Industry watchers expect that the creation of the Mittal colossus will trigger further M&A moves in the steel sector as smaller players realize they can’t afford to stay on the sidelines as the sector’s largest players push on with consolidation.

PwC says the rationale for the largest players getting even bigger is simple enough: a small group of massive global players will have “greater bargaining power with suppliers and customers, greater financial strength and greater operating flexibility — making them more attractive to institutional investors.”

Yet, even with its size, Mittal produces only 5% of the world’s steel, and the top five, a mere 18%, meaning the sector is still highly fragmented. By comparison, in each of the aluminum, automotive and iron ore sectors, the top 5 companies have a combined market share in the 40-50% range.

Says Lakshmi Mittal: “There should be at least three players between 80-100 million tonnes. Everyone experienced the severity of the last downturn. . . and began to appreciate that there was a real need for change. I do not believe that 80-100 million tonnes is an unrealistic target.”

In the next phase of consolidation, it’s just as likely that the larger steel producers will decide to buy more iron ore production facilities in order to hedge against price volatility in their raw materials.

With the steel industry getting stronger by consolidating and moving upstream in the iron-steel value chain, it’s inevitable that independent iron ore producers will see further erosion in their bargaining and price-setting powers.