What Outokumpo and ThyssenKrupp-Inoxum's Merger Means For Us

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Ferrous Metals, M&A Activity

However much Outokumpo talks about the desirability of merging the complimentary products ranges of their company with Inoxum, the recently spun-off stainless division of ThyssenKrupp, the fact is: this merger is all about rationalization.

The European — if not the global — stainless market is characterized by too much (and too high-cost) production capacity. The industry has held off rationalizing for far too long and as a consequence has low capacity utilization. As a further result of its fragmented nature, it has little influence over market prices.

Indeed, Europe’s prices for commodity stainless products are set more from Asia than from European majors; witness the repetitive losses announced by European stainless steel makers. Outokumpo achieves around 70% capacity utilization, but is hoping a series of melt and fabrication shop closures will eventually boost this to 85-90% by 2017, following the merger.

Let’s Make a Deal

ThyssenKrupp is not completely abandoning the stainless market. They will retain 29.9 percent in the new venture, but this may be more because Outokumpo cannot afford to buy Inoxum outright — even the deal structure announced this week will require them to raise €1 billion ($1.31 billion) via a rights issue in order to compensate ThyssenKrupp as part of the €2.7 billion ($3.54 billion) deal.

While the markets voted their opinion by marking down Outokumpo’s share price by 9.5 percent to €6.66, Thyssen’s rose by 2.7 percent to €21.67 following the news, before share dealings were halted, the FT said. The fall in Outokumpo’s share price came on top of an earlier 15-percent drop following the announcement of an operating loss of €71 million ($93 million) for the last three months of 2011 — much higher than analysts had expected.

The combined group is looking to achieve synergies or savings of €250-270 million ($327-354 million), Reuters said, largely from the closure of melt shops in Germany at Krefeld and Bochum, cold-rolling facilities in Sweden and improvements in the matching of production functions, which are hoped to lift capacity utilization to between 85% and 95%.

Yo, What’s Good?

There are some plus points: the two firms have a spanking new stainless mill courtesy of ThyssenKrupp in Alabama, an enviable brand position at the top end of the market and a depth of research, development and production experience second to none. The two firms also complement each other rather than directly overlapping as out-and-out competitors.

Outokumpu is a leader in austenitic and duplex steels, widely used in the chemical and energy sectors; and Inoxum is a leader in ferritic, nickel-free steel for the automotive and white goods industries, as well as an important supplier of high-performance alloys commonly used in the aviation sector, according to this source. The combined firm will be the market leader in the European stainless steel sector with almost €12 billion in revenues, more than 19,000 employees and about a 50-percent market share.

Regulators are unlikely to block the deal, as everyone knows it’s “merge or die” for Europe’s stainless mills, and no producer has a price-setting dominant position. Apparently, shares in Aperam, the European stainless steel unit spun off from ArcelorMittal last year, and Spain’s Acerinox, rose sharply last week on hopes that the takeover would help trigger further consolidation.

What It Means For Stainless Buyers

Will it be good for consumers? Yes, in the long run; if a free and open market like the EU is to have local producers, they have to be profitable. Without mergers, better control of costs and rationalization, there will be no investment and will eventually lead to plant closures on an even larger scale, and that would not be good for consumers.

A combined firm will have greater control over pricing, but with their product ranges only partially overlapping, consumers may not notice any difference for years. In the meantime, having a healthy European producer of stainless materials for the oil, gas, nuclear and aerospace markets probably trumps all other considerations.

–Stuart Burns

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