Consolidation in the steel industry

Abstract

The winds of consolidation that have been making waves across the global steel industry in recent years have finally reached Asia’s developing giants, India and China. In July 2006, the consolidation surge reached it peak so far when Mittal Steel acquired its rival, Arcelor, after a long and bitter contest. The price tag was a whopping US$33.7 billion. The deal has taken Arcelor‐Mittal to the top spot in the global steel industry ranking with annual production capacity of 113 million tons. Next, In February this year, India’s Tata Steel acquired Corus, the 8thlargest steel producer in the world, itself the product of a merger between British and Dutch steel giants making the Tata Steel now the 5th largest player in the steel industry with a combined capacity of 25 million tons. Other major producers Russia and Japan consolidated their industries in the 1990s, so the industries in India and China are finally playing catch‐up. Both the Asian economies need massive amounts of steel for their on‐going infrastructure, construction and urbanization projects so their steel producers are pursuing mergers and acquisitions (M&As) to gain both greater economies of scale and weight in the market. But while current moves can be said to be a reflection of Asia’s economic boom, the strategy of consolidation in the global steel industry has been long underway. Many see the consolidation and rise of big steel companies as a means to secure stability in the volatile industry. Surges in demand for steel have caused the price of raw materials ‐‐ iron ore and ferrous scrap ‐‐ to soar. Producers must therefore find ways to lower their production costs. The possibility of negotiating sympathetic contracts with iron suppliers and automotive industry customers are unlikely as both the iron ore and automotive industries are themselves tightly consolidated. The top five producers of iron ore account for 70% of the world’s iron ore output while the top five in the steel industry only control 20% of global steel production. This relative fragmentation in the global steel industry means that steel producers do not have the clout to set prices or negotiate better contracts. Consolidation offers a way to gain control over both the price of raw materials and steel products. The steel firms could grow either horizontally though Greenfield, Brownfield projects as well as through acquisitions. It could also vertically integrate to reduce dependence on its suppliers and buyers. Another way in which they could expand is by deconstruction and forming global alliances. The growth strategy matrix provides an indication as to what strategy a firm must adopt to gain a particular competitive advantage and the mode of project/acquisition it must undertake to achieve the same. The trend in the future would be players in Europe and North America continuing to concentrate on high quality products but at the same time trying to increase their upstream capacity in low cost countries. In this way, they would be able to maintain their end production facilities closer to their customers so as to meet their demands for shorter lead‐times.