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Consolidation revives: steel industry players and analysts say consolidation and rationalization of capacity is working to stabilize the market and make steel production and trade more efficient.

Article Excerpt
PARTICIPANTS AND OBSERVERS alike have been astounded by the brisk pace of steel industry consolidation of late, and the urge to merge is likely to remain strong through 2006 and beyond, especially if worldwide steel demand stays fairly robust.

The largest and most controversial deal under consideration (it's been hotly debated, particularly in the European Union) is Mittal Steel Co. N.V.'s $22.7 billion takeover attempt of Luxembourg-based Arcelor SA. The combination of the world's two biggest steelmakers would create a giant with a market share estimated at more than 10 percent of the global industry.

As of late March, this mega-deal was far from done, however, as citizens and politicians in Luxembourg protested loudly out of nationalistic pride and fear of lost jobs. Indeed, steel industry consolidation often faces opposition.

The Financial Times of London reported in March that South Korea's Posco, the world's fifth largest steelmaker, might ask Japan's Nippon Steel to buy more of its shares to help fend off any potential hostile takeover attempts. Nippon is Posco's strategic partner: Posco has a 2.2 percent stake in Nippon and Nippon owns 3.32 percent of Posco.

Even rumors about deals have helped make steel stocks hot. AK Steel's shares climbed more than 23 percent in one day in March after a published report said AK was in merger talks with U.S. Steel Corp. Analysts and rating services have called for buys on certain companies, based on market fundamentals as well as increasing market value.

The renewal of steel industry M&A activity is driven in large part by newfound financing. Two years of strong steelmaking profits have gained the industry access to capital, either through their own healthy cash flow or among banks willing to take a risk on what appears to be a growth market. Global steel production crossed the 1 billion ton threshold last year and many analysts predict up to 5 percent growth per year in the coming decade. Furthermore, apart from energy prices, inflation is a non-issue and there isn't even a whiff of recession in the air.

It's not all about getting bigger and wielding more leverage over suppliers or customers,...

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