Two Steel Mergers Worth Watching

It’s nice to be noticed for doing a great job. It’s quite another to take the heat from a CFO demanding cost reduction for steel and related metals products. Purchasing managers and their staffs have been riding a commodity volatility wave for a few years now. But some executives are just noticing the impact that these nasty little things like steel price hikes are having on the bottom line. So when normally I might be inclined to yawn through a merger and acquisition article that I stumble upon, now, I read with eyes wide open for any glimpse of what lies in store.

It was with great interest that I saw Severstal (Russia’s biggest steel maker) has now made a bid for troubled Esmark, matching competitor Essar’s (of India) bid with one interesting addition; namely, a more favorable agreement for the United Steel Worker’s union. Smart move for a company that seeks to build its US presence. But it’s a greater move for US steel buyers. With price increases coming fast and furious, placing domestic steel capacity in foreign hands may actually be very good for the US. We believe foreign owners, in an attempt to grow market share here in the US may carry a sharper pencil  as opposed to idling operations to keep prices high.

Perhaps just as interesting, the upward integration of steel producers has also generated additional M&A discussions. According to the Financial Times, steel mill ArcelorMittal will spend $4b to acquire Macarthur Coal to shore up additional raw material supply. Although the consolidation of the steel industry may not be great for competition, securing raw materials will provide better supply continuity and in theory allow for greater control over pricing. Of course, whether or not the mills will pass on cost reductions to their customers, that’s another story.

–Lisa Reisman

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