Corus left with few options after Tata bid

Tata Steel’s bid for ailing Anglo-Dutch steelmaker Corus has made less of a splash than the recent mega-merger between industry giants Mittal Steel and Arcelor, but it heralds important developments in the global steel market. Should the €7.62 billion friendly bid from India-based Tata succeed next year, it would kick-start significant production developments to ensure the survival of smaller companies.

When Lakshmi Mittal finally achieved his dream this year of creating the world’s number one steel company, the future for smaller players looked rather uncertain. Fearful of being blown out of the water by Arcelor Mittal, executives from smaller companies started looking around for deals.

Corus, as the world’s ninth largest steelmaker, could hardly be described as small, but with an annual output of 18.2 million tonnes last year, it will be dwarfed by the mighty Arcelor Mittal. Company executives knew they would need to reach out to players in emerging markets to stay in the game.

"What you’ve had is Corus approaching emerging market players and saying: ‘here we are’. They recognised the need to consolidate in the long term," says Andrew Snowdowne, a steel analyst at investment bank UBS. "Corus tried to restructure internally, but that was not enough to catch up. Without a deal, will its share price fall? Probably."

One industry expert describes the deal as "rebuilding the steel industry". While Corus receives significant revenue per tonne of steel owing to high steel prices, only 30% of its output is sold through long-term contracts, making it vulnerable to any slumps in the market. Over the past three years, prices have risen because of strong demand in China, a trend that looks set to slow as the country asserts itself as a major steel producer.

The volatility of the steel market would have been reason enough for Corus to start looking around for a deal. It was hardly short of suitors. Companies such as Russian company

Severstal and Brazilian group CSN were also interested in a deal. In the end, Corus plumped for Tata, one of the lowest-cost producers of steel slab, an intermediate form of the commodity that could feasibly be transported to Corus’s European plants in Germany, France, Norway and Belgium for transformation into more sophisticated products.

But Tata’s capacity for increasing exports of steel slabs will take a while to develop, says the industry expert. "Plants at the moment do not have the logistics to be able to send anything abroad," he says. "Tata would not be able to send in large quantities to the UK until 2009."

The deal evidently makes sense for Tata, currently the 55th largest player in the world. Not only will it gain access to more sophisticated technologies, it will also benefit from increased leverage in the European market. The only thing now standing in its way is Corus’s shareholders who are still holding out for a better deal. "They will always say: ‘We want more’," says Snowdowne. "But clearly, without another offer, they’ll have to take it."

The merger, expected to be finalised in mid-January, will be the first of many, Snowdowne thinks. Despite the dominant presence of Arcelor Mittal, there is still ample room for further consolidation in the global steel market. Partnerships between struggling, but technologically advanced, companies in the West and low-cost producers in emerging economies are set to be a trend in the coming years.

Tata Steel’s bid for ailing Anglo-Dutch steelmaker Corus has made less of a splash than the recent mega-merger between industry giants Mittal Steel and Arcelor, but it heralds important developments in the global steel market. Should the €7.62 billion friendly bid from India-based Tata succeed next year, it would kick-start significant production developments to ensure the survival of smaller companies.

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