METALS COMMENTARY (May 19, 2008)

Amid capital market turbulence, the global metals sector has seen a rush of mergers and acquisitions (M&A) and will continue to do so, according to a new report issued by PricewaterhouseCoopers (PwC).

The study, entitled “Forging Ahead,” says deal-making in the global metals sector increased 67% from the previous year.

In 2007, there were 411 disclosed deals, compared with 385 deals in 2006. On the surface, this looks like a small increase, but the economics of the deals is where the true growth is visible.

The aggregate value of deals in 2007, at US$144.7 billion, is a huge leap from the US$86.4 billion recorded the previous year.

A good portion of this rise can be attributed to the aluminum sector, the report says. A total of 56 aluminum sector-related transactions took place in 2007, worth US$77.3 billion — almost four times the US$21.3 billion generated between 2003 and 2006.

At the centre of M&A activity in the aluminum sector sits Rio Tinto’sacquisition of Alcan, worth US$38.1 billion, coupled with the US$30-billion merger of the aluminum assets of RUSAL, SUAL and Glencore International to form the United Company RUSAL.

The steel sector saw minimal M&A action but highlights include Tata Steel’s acquisition of Anglo-Dutch Corus. Luxembourgbased steel giant ArcelorMittal also made a few smaller acquisitions, including Sicartsa, a long steel mill in Mexico, and Border Steel, a mini-mill in Texas.

The analysis also offers a breakdown of metals M&A’s in key regional markets.

North America

With 115 deals worth US$77 billion, North America has gradually slid into place as the world’s metals M&A hotspot.

The surge in interest in the North American metals sector, is partially rooted in the world’s fascination with the U. S. market. PwC forecasts metal consumption to grow by 3% a year for the next two years, outstripping production.

In addition to the U. S., Canada became a major ground for foreign investment, with two of three of Canada’s key steel assets being purchased by foreign owners.

Central and Eastern Europe

This region saw a rise in M&A’s last year, with 23 deals worth US$30.8 billion compared with a value of US$3.3 billion in 2006.

PwC credits the US$29.9-billion creation of United Company RUSAL as the catalyst in the region’s increased M&A activity.

However, the study notes that the steelmaking sector in Central and Eastern Europe is vastly consolidated, with the top 10 manufacturers controlling 85% of crude production.

Western Europe

Although there was an increase to 104 deals in 2007 from 69 deals last year, the value of metals M&A’s in Western Europe fell to US$20 billion in 2007 from US$49.3 billion in 2006.

The aluminum sector saw 18 deals collectively worth US$129 million, up from US$76 million the previous year.

Central and South America

In 2007, Central and South America saw 21 deals worth a total of US$9.6 billion — 75% of which represented M&A activity in the steel sector.

Anglo American’s acquisition of a minority stake in the Sistema Minas-Rio iron ore mine also contributed.

Asia Pacific

In the Asia Pacific region, there were 148 deals worth US$7.2 billion dollars in 2007, a drop from the previous year’s 154 deals worth US$15.1 billion.

In China, the steel sector is fragmented, despite government efforts to promote M&A activity through its Steel Industry Development Policy, resulting in less consolidation in the region.

–Forging Ahead is available from PricewaterhouseCoopers at www.pwc.com/metals.