AT Kearney recently published a report called “Mining + Steel How Will M&A Play Out? The report raises some interesting points and theories on what M&A activity might look like for the steel and mining industries and perhaps of greatest interest, why those activities will take place. We’ll limit our discussion to what we consider the most interesting points.
Those points center on the following concepts. The first, though at first blush appears obvious may not appear as common knowledge to many sourcing professionals large global diversified conglomerates have larger market caps than their single commodity peers, within the mining industry. The second concept that we found intriguing centers on AT Kearney’s “Merger Endgame Theory which suggests, “all industries will consolidate globally over a roughly 25 year horizon in four stages. The third concept that supports much of what we have reported on MetalMiner, centers around the correlation between iron ore and steel prices (which according to AT Kearney that correlation has increased since 1998). Finally, the report suggests four M&A scenarios involving mining companies and steel mills with the likeliest scenarios involving mining consolidation and steel consolidation (vs. steel firms buying mining firms or mining firms buying steel firms).
What can we take from the first point that market cap increases when mining companies have diverse vs. less diverse portfolios? AT Kearney makes the point that global mining firms remain highly fragmented so plenty of consolidation opportunity exists. We’d go one step further by stating that the high stakes game for “shoring up raw material supplies in all metal supply chains will also play a role in these global M&A deals and we’ve just started seeing this for some of the rare earth and critical metals supply chains (see our recent post on Posco’s investment in PAL, a lithium project).
We won’t comment on the Merger Endgame Theory except to say it’s interesting and we’d encourage readers to click through to the report just to look at the theory.
The third point, suggesting iron ore prices and steel prices more tightly correlate then they did previously should not come as a surprise to anyone. As the Big 3 iron ore producers now have 70% of the iron ore market, we’d expect that to be true. Based on our own regression models, however, several other factors also tightly correlate to steel prices besides iron ore. Finally the four M&A scenarios outlined in the paper examine several rationales for the various scenarios. These include increased consumption, resource scarcity, improved technology, globalization and increased regulation. The report predicts an increase in M&A activity, “if these industries grow significantly, companies will have cash to invest and will face pressure to deliver better results, which means M&A will be the most logical strategy, the only damper to that scenario rests on the overall health of the global economy. But a weak economy will also drive more M&A deals as cash-rich firms search for discounts. So no matter which way things go, we can expect a lot more M&A in the mining and steel industries.
Now what that will do for price stability or volatility, well that’s a subject of another post!