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Mittal-Arcelor merger: Our view...

Jun 26, 2006

The inevitable has happened! The world's second largest steel maker, Arcelor has finally bent to a US$ 32 bn takeover bid by its larger competitor, and world's largest steel maker, Mittal Steel. The combine will create a global steel giant that will be almost 3 times bigger than the nearest rival, Nippon Steel of Japan. The agreement has been arrived at after almost a five-month battle, which has involved, apart from Mittal Steel and Arcelor, several European governments.

Parameters Unit Mittal Steel Arcelor
Capacity MT 63.0 46.7
Revenues US$ bn 28.1 39.1
EBIDTA margins % 20.6 17.3
PAT margins % 12.0 11.8
The combined entity will be called Arcelor-Mittal and will have a 10% share of the global steel capacity of 1,132 m tonnes (MT) per year. As reported, while the Mittal family will hold a 43.4% stake in the new entity, Arcelor shareholders will own 50.5% stake. Lakshmi Mittal and Joseph Kinsch (Arcelor's current Chairman) will jointly head the new corporation, which will have combined revenues of around US$ 69 bn.

As indicated in a Mittal Steel presentation, the combine, with a geographical footprint in 27 countries (with 61 manufacturing locations), will have several strategic advantages like:

  1. Leadership position in high-end segments in North America, with strong R&D capabilities;

  2. Operations in high-growth economies of Asia and South America with low-cost profitable assets and local operations expertise in numerous emerging markets;

  3. Access to raw materials and upstream integration

  4. Well-balanced portfolio exposed to the whole spectrum of steel products

So, what are the implications for Indian steelmakers?
Not much, really! While the Arcelor-Mittal combine will hold around 10% of the global steel manufacturing capacity, it is still not sufficient to create any monopolistic kind of a situation in the steel markets. The fact that the largest player in the market (Arcelor-Mittal) will only have a 10% share (top 10 steel producers only just 26% of the global steel capacity) speaks volumes of the nature of fragmentation in the industry. Since 2000, the world steel capacity has increased by as much as 5% per annum with major players expanding capacity to take advantage of the favorable pricing situation. In this backdrop, it is difficult for one or two players to be price makers. While the new entity (Arcelor-Mittal) will be in a position to guide steel production and prices in select regions where they have a stronghold, on a global scale, the implications are not really serious.

More importantly, it is not only steel prices that are important, but also the cost of inputs i.e., iron ore and power. Even as capacity is increasing at a faster pace, there is a shortage of iron ore supply, which is forcing manufacturers to acquire interests in mines. In fact, for 2006, the Chinese steel producers have agreed for more than 16% increase in iron ore prices (from South America). The adjacent graph reflects the trend in hot-rolled steel prices, cost and profit per tonne (Source: Steelonthenet). Despite prices going up significantly in the last five years, the corresponding change in profit per tonne is not that significant. In our view, integrated steel players are much better play as compared to pure steel manufacturers. Having said that, given the fact that interest rates around the globe is on an uptrend, the prospects of global economic slowdown cannot be ruled out, which in our view, will have a negative impact on commodity prices.

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