Consolidation may not assist steel makers, tribunal told

Articles: Consolidation may not assist steel makers, tribunal told

Posted by admin on Tuesday, April 18, 2006 - 07:37 AM

MANY global steel companies and their shareholders are pinning their hopes for control over steel prices on consolidation, but consolidation would not necessarily turn steel companies from price takers into price makers.
Carli Lourens

Two international experts have put forward opposing views on potential effects of consolidation during the Competition Tribunal’s hearing on Mittal Steel SA’s alleged excessive pricing. The local steel maker’s parent company, world number one steel maker Mittal, said there was merit in consolidation. Mittal is leading the intercontinental consolidation drive and recently launched an audacious $23bn takeover bid for the world’s second-largest steel maker, Arcelor. But Mittal Steel SA’s expert witness, Philip Tomlinson of CRU International, told the tribunal that prices had not necessarily improved in markets such as Europe and the US, where there had already been significant consolidation. Consolidation had to achieve a smaller number of considerably larger companies in order to give steel companies greater influence over prices, Tomlinson said. The global steel industry was highly fragmented and even if Mittal had succeeded in its bid for Arcelor, the merged entities would account only for about 10% of world steel production. He also said barriers to consolidation in China were likely to put a drag on the trend. China produces about 27% of world steel and would control about 38% by 2010, according to forecasts. “While the rest of the global steel industry is playing consolidation games, China holds the key,” Tomlinson said. This meant that China would become the dominant factor in the industry in the next few years. And this, in turn, implied that the world’s biggest producers would then be wholly or partly Chinese owned, he said. Consolidation in China needed to be successful if effective global consolidation was to take place. The Chinese government wanted to consolidate by integrating low-profit or money-losing producers into the big players before it was too late, he said. But there was opposition by provincially owned steel makers. A merger between centrally owned steel maker Anshan and provincially owned Benxi had been 10 years in the planning and was still not complete. Large-scale consolidation, if it occurred, would attract new entrants because of the relatively low barriers to entry. It would drive margins back down again. Harmony Gold and DRDGOLD’S global steel expert witness, Peter Fish of UK-based steel market analyst Meps, was more optimistic about consolidation benefits, saying it had already improved steel makers’ ability to influence global steel prices. The industry could now manage its production levels thanks to major consolidation around the world. “This has limited the degree of competition in the market through privatisation, mergers and acquisitions in the steel manufacturing sector.” Fish said steel companies were quick to adjust their prices and output control. “Without consolidation, it is unlikely that recent price levels would have been achieved.” He said it would have taken longer to establish recent significant production cuts in the major markets.

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