Steel girds itself for merger fever

Date: 08/03/01

By Bruce Barnard

THE steel industry has set a tough teaser for competition regulators in Brussels: how to handle a European giant that's a global pygmy in the fragmented 600 billion euro-a-year world market.

The merger of France's Usinor, Luxembourg's Arbed and Spain's Aceralia will create the world's biggest steelmaker - with a 110,000-strong payroll, annual revenues of €30 billion and output of 46 million tonnes that will leave current top-dog Nippon Steel trailing a poor second.

The new group, temporarily known as NewCo, will dominate the west European market, accounting for nearly a third of its total production and, more important, some 40% of its output of hot rolled coil (carbon steel) which is used in cars and white goods such as washing machines. NewCo's size will give it an edge over its European rivals and more clout in negotiations with big customers such as automakers.

But it is unlikely to have much sway over prices, which are set globally, not in Europe. And NewCo is a midget in the global market, accounting for only 5%-6% of last year's output of 828 million tonnes though it has a more respectable 10% slice of the carbon steel market. Any attempt to raise prices will suck in imports from neighbouring east European plants and more distant low-cost producers.

The NewCo executives probably have sounded out the European Commission about potential concessions required for approval for the merger without a prolonged probe and the two sides will chew over the details in the coming months. The Commission will not be a pushover; it showed its teeth last year by blocking a three-way aluminium merger though the firms demonstrated they were uncompetitive on their own.

The planned steel deal, due to take effect in September, will intensify pressure on rival steelmakers to regroup to protect their markets. ThyssenKrupp - which last year made a half-hearted attempt to link with Usinor and failed to demerge its steel business, Germany's largest - is expected to lead the next round of consolidation. The most likely candidates are much smaller, and more profitable, including Austria's Voest Alpine Stahl, Finland's Rautaruukki Oy and Svenskt Staal of Sweden.

European steelmakers regard mergers as the best way to survive and prosper in one of the world's most cyclical businesses. The last big consolidation was in 1999, when Thyssen merged with Krupp, Usinor acquired Belgium's Cockerill Sambre and British Steel teamed up with Hoogovens of the Netherlands to create Europe's then-largest steelmaker, Corus. That has put Europe in better shape than the fragmented US industry, which has seen 11 firms file for bankruptcy protection in the past two years. What's more, European productivity is around 40% higher than in the US.

The pressures to join forces have intensified as companies emerge from a recession spawned by global overcapacity and soft demand. The spot price of hot rolled coil has tumbled by a third in 12 months to a 20-year low of around €200 per tonne. There are signs of a turnaround with world production rising 3.2% in January, the first monthly gain since February 2000.

Western Europe is ahead of the curve, with output climbing 4.1% compared with a 16.2%-slump in the US. Mergers have helped to cut costs: NewCo reckons it will save €300 million annually within years, rising to €700 million by 2006. But that is not enough. Corus, citing the corrosive impact of a strong pound, has just announced 6,000 layoffs by 2003 coupled with a 20% cut in capacity at its British plants, following a cull of 4,500 workers last year.

Mergers do not address the industry's key problem of chronic overcapacity, estimated at around a third of global production. Plant closures in Europe and the US have little impact because other steelmakers usually take up the slack, especially in Asia where output rose 7% last year to 320 million tonnes and in the former Soviet Union where output surged 16% to 96 million tonnes.

There is little immediate pressure to take out capacity in Europe, with utilisation running at over 90% and prices firming, but companies will be left with idle capacity again in the next downturn.

NewCo must achieve cost efficiencies by shutting underperforming plants but this will take time because big job cuts will create political havoc in France and Spain. Analysts say NewCo has set an optimal size for a steelmaker and its European rivals must respond with a matching combination of say, Corus and ThyssenKrupp. The German company has some leeway because steelmaking accounts for only 30% of its revenues.

Steelmakers also are under pressure to consolidate globally to meet the demands of their multinational customers, particularly car makers seeking a similar quality steel at all their plants around the world. Usinor and Nippon Steel have forged an alliance to develop steel-sheet products for their auto customers.

These partnerships will pave the way for deeper relationships in an industry that still shies from intercontinental mergers and remains extremely fragmented, with the top ten firms accounting for just 25% of global production. Nippon has made a start, taking a 2.3% stake in South Korea's Pohang Iron & Steel (Posco) in October and is also mulling buying into Baosteel, after China's largest maker lists its shares abroad.

NewCo will have a manufacturing presence outside Europe as Usinor and Arbed both have plants in Brazil and the French steelmaker has established a foothold in North America through a joint venture with Dofasco of Canada. Meanwhile, ThyssenKrupp has been talking with two US firms, National Steel and AK Steel, as well as NKK and Kawasaki Steel of Japan.

For the moment, however, the ball is in the court of the Brussels regulators as they start their probe of NewCo.

Major feature.