The global steel market is changing right before our eyes
The US stock markets have continued to turn in solid performances. One of the market's strengths came from an unlikely source: good, old fashioned steel mills - the "ancient" industry which not too long ago was left as hopelessly loss-ridden.
Until 2004, worldwide
steelmaking capacity exceeded demand. Then came the "bumper year" of 2004 with the spectacular explosion in steel demand, rising prices and profitability. Though most of 2005 saw an inevitable correction in the steel sales, it was still a very strong year where most mills still showed solid profits. More importantly, the year 2005 saw the consolidation process reignite emphatically after having taken a short breather.
Experts have long agreed that worldwide consolidation of the steel industry is inevitable and that at one point capacities will have to be curtailed. That is why big conglomerates are trying to get bigger still. Size and market dominance matter, and mergers and acquisitions take place even in formerly very-protected steel markets such as
Turkey.
China still adds more steel capacity every year, but the Chinese government has already started the process of nudging mills into mergers. Foreign steel mills have already started buying shares in Chinese steel mills and will soon own companies there outright.
The bidding contest between Arcelor and Thyssen Krupp for Dofasco was the first strong indication that an old fashioned merger mania and/or acquisition drive could be upon us. This was followed by Mittal's outrageous move on Arcelor. If successful, and that is still a very big if, the world would see an all-domineering steelmaker. So, the table is set: consolidation is necessary; the bigger the size of the company the better the chance of survival, and there are mills that seem to be ready to be acquired. AK Steel and
US Steel (with fully-funded pension plans) are considered prime targets. In both cases you would get access to the US
automotive industry. Despite the crisis in the car industry, this still seems to be a highly lucrative market to enter. After all, Americans will continue to buy cars.
In the meantime, the Techint Group launched an Initial Public Offering (IPO) of their Ternium branch which has Siderar in
Argentina, Sidor in
Venezuela, and Hylsamex in
Mexico in its fold. The first day of
trading saw a rise of 17 percent of the initial share price of $20.00.
As the Mittal - Arcelor drama unfolds, Wall Street clearly pays attention to the steel industry in anticipation of further takeovers or mergers. Who will eventually make a run on
US Steel (Thyssen and
Nucor are mentioned frequently)? Where will Ternium invest the money they have raised on the stock exchange? Their strength lies in Latin America. Whom will Arcelor target, provided they can successfully rebuff Mittal?
Speculations abound, but one way or another, the consolidation process will continue.