Five years ago, the world's steel industry was languishing as the least fashionable and most overlooked sector in the 'old' economy. Tales from the blast furnace were restricted to a sorry litany of low prices and job cuts; of struggling European companies being forced into each others' arms to prevent collapse while jobs and capacity shifted, as in all manufacturing, to the Far East.
Today things are different. The East, then seen as a threat to the West, has for the past three years underpinned the industry's re-emergence as a successful, money-making business, based on demand for steel to fuel the dizzying growth of China, India and other emerging economies.
Yet, for an industry that now operates in a recognisably global market, steel is still notoriously fragmented. Mittal Steel, the world's largest producer, makes about 60 million tonnes a year, but accounts for only some 5 per cent of total global production. The top 10 companies account for 30 per cent of the market; the top 30 barely 50 per cent.
Now, eastern and other emerging economies present further opportunities, this time to consolidate. India's Lakshmi Mittal has ambitions for a company with three and a half times its current capacity.
The European mergers that have characterised the past decade, those that produced Luxembourg's Arcelor, Thyssen Krupp of Germany and the Anglo-Dutch group Corus, were born of weakness. But the momentum stalled with Arcelor - at some 45 million tonnes of production almost as large as the other three combined, yet still well below 5 per cent of global output.
For many observers Mittal's model of acquisitive growth may be the model for the next few years. He has grown his group through acquisitions from eastern Europe to the US over the past two decades. His next move is his unwelcome bid for Arcelor. The combined company would produce roughly 10 per cent of the global market and be spread across the world from emerging central Asia and India, to developed Europe and the US.
There is a clear logic to doing deals across regions between developed and consolidated markets and emerging economies such as Russia, India, Brazil and China, where there is still fragmentation.
As one analyst says: 'If you are a developed nation, you want access to cheap raw materials and low production costs. If you are developing you want things like a London listing, high quality corporate governance, competition, and access to markets for high quality goods. This is what Mittal has managed with his acquisition record and listing on Western markets.'
Mittal's strategy has been to match low-cost production in eastern Europe with a listing in Amsterdam and New York and access to the high-quality US automotive market via his acquisition of US steel. He is aiming for European markets and access to low-cost raw materials (Brazilian slab steel) in his move on Arcelor.
Arcelor, which last week unveiled a merger with Severstal of Russia, is following the same logic (presenting Arcelor with the difficult job of justifying to shareholders its deal with the Severstal boss and its snubbing of Mittal.)
Russia's Evraz, in which Roman Abramovich is interested, has already made its first step, increasing its visibility in the West via a London listing. It has also reportedly been in talks with Corus, which has 19 million tonnes of production, about a strategic partnership. Corus has also reportedly talked to CSN of Brazil, with which it was considering merging three years agobefore negotiations faltered.
Corus is another good example of a sub-scale maker that is vulnerable to takeover in a consolidating market, in the view of analysts. Similarly its German rival Thyssen Krupp is often talked about as an acquirer or acquiree. The odds on Corus and other relative minnows among the European makers remaining independent are long, and will lengthen further once Arcelor has lost its independence to Mittal or Severstal.
Fragmentation itself is not the only precondition for the next round of global consolidation. Now that companies have the financial firepower to buy assets, they may look to do so while the price of steel remains high.
Steel companies began to hit the doldrums in the Nineties, and by the end of 2003 metal prices were close to $200 a tonne. By 2004 they touched $600, converting steel companies from debt mountains to cash machines. With prices between $400 and $600, companies are still generating cash and looking to make deals.
As analysts at Credit Suisse have noted, steel now has a 'global balance sheet to achieve this [consolidation]'.
However things shake out, industry watchers are sure that Mittal's bid for Arcelor, Arcelor's white knight riposte with Severstal, and Abramovich's moves on Evraz herald a new round of deals.
