Articles in Category: M&A Activity

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This morning in metals news, Brazilian authorities are questioning Norsk Hydro over its decision to halt operations at its Alunorte alumina refinery, the ThyssenkruppTata Steel merger could be subject to merger control regulation and BHP says China’s Belt and Road Initiative could lead to a surge in copper demand.

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Para Surprised by Hydro Decision

According to a Reuters report, the Brazilian state of Para was surprised by Norsk Hydro’s recent move to shut down operations at its Alunorte alumina refinery.

Following the move, aluminum prices have skyrocketed this week (alumina is one of the materials used to produce aluminum). On Wednesday, aluminum prices jumped 2% to its highest level in more than a month.

BHP Says China’s Belt and Road Could Boost Copper Demand

Miner BHP said China’s Belt and Road Initiative could provide a boost of 7% of annual demand to copper, Reuters reported.

According to BHP’s analysis, the initiative represented one-third of the global economy and would yield $1.3 trillion in spending over the decade to 2023.

Merger Control Regulation Could be Coming for Tata-Thyssenkrupp

According to the Economic Times, the European Commission’s Official Journal notes the merger of the European operations of Thyssenkrupp and Tata Steel could be due for merger control regulation.

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The merged operation would become the second-largest steel entity in Europe, behind only ArcelorMittal, should it become official.

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This morning in metals, Shell’s chief executive says $80 oil is good for energy infrastructure investment, China’s Baowu is reportedly in talks to acquire a rival and base metals prices dropped on Tuesday.

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$80 Oil? Shell CEO Says It’s Not Unreasonable

In a CNBC interview, Shell CEO Ben van Beurden said $80 oil would not be unreasonable and would support energy infrastructure investment.

Van Beurden added some of the Trump administration’s quotas on steel imports have impacted the company’s construction projects.

MetalMiner’s Take: Shell is probably right in estimating the world can afford $80/barrel oil prices without harming growth; certainly, the U.S. economy is testament to that at the moment.

But rising steel costs due to import tariffs are causing oil companies headaches when funding new infrastructure projects, projects the industry desperately needs to overcome transportation bottlenecks and meet rising refined product demand overseas.

Outside of the U.S., oil majors are pushing ahead with large investments in a buoyant refining market. Exxon just announced a half-billion-dollar upgrade to its giant Fawley refinery in the U.K. to meet rising demand, surely a sign the oil price and demand trump construction costs.

Baowu Eyeing Rival Firm

According to a Reuters report, the Chinese steelmaking heavyweight China Baowu Steel Group is in talks to acquire rival Magang Group.

Per the report, the combined output of Baowu and Magang last year surpassed total U.S. production.

Metals Prices Drop

Base metal prices struggled on Tuesday, according to a Reuters report, on the heels of a one-day closure of Chinese markets.

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After surging Friday, LME copper dropped 0.8% on Tuesday.

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Before we head into the weekend, let’s take a look back at the week that was with some of the stories here on MetalMiner:

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It has been a long, tortuous road, but finally ArcelorMittal’s reported €2 billion purchase of Italy’s Ilva steel plant looks like it is nearing completion.

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The deal was largely contingent, according to a European Commission Press release, on an agreement between unions and the buyer over future employment at the plant.

Early and vocal opposition from unions was all around staffing levels with both rival bids. India’s JSW was the rival bidder at the time, indicating significant job cuts in order to address one of Ilva’s three key challenges.

According to union officials reported in the local press at the time, the Mittal-led consortium wanted to reduce staff numbers from 14,200 in 2016-2017 to 8,400 by 2023, while the rival bid would cut head count to 7,800 over the first year but then bring it back up to 10,300 by 2023.

The final deal agreed this month and announced on the company’s website states ArcelorMittal has committed to initially hire 10,700 workers based on its existing contractual terms of employment. In addition, between 2023 and 2025, ArcelorMittal has committed to hire any workers who remain under Ilva’s extraordinary administration (essentially, its nationalized current operating position).

Challenges Facing Ilva

Ilva faces three main challenges.

The first has been decades-long environmental breaches resulting in reported raised incidences of cancers and respiratory diseases in the area.

The second is probably a contributing factor to the first: endemic losses caused by uncompetitive staffing levels, overseas competition and underinvestment.

The third is the fact that Ilva is located in an area of high unemployment with scant opportunities for workers to find alternatives. If Ilva were to be closed, the impact on the region’s economy would be devastating. Yet, the plant requires massive investment to cut the environmental pollution and to improve efficiency if it is to have a future. ArcelorMittal has committed to invest some€4 billion, with €1.1 billion of the investment to go toward environmental cleanup, while €1.2 billion will go into production improvements.

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As Europe’s largest steel plant and, as such, a strategic source of employment in a depressed area, it was unlikely the plant would be allowed to close by the Italian government. A takeover was inevitable at some stage, but the buyer was always going to need deep pockets.

ArcelorMittal will make a better steward than many others and, at least, ensures a future for the plant.

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Before we head into the weekend, let’s take a look back at the week that was and some of the metals storylines here on MetalMiner®:

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According to a recent PwC report, mergers and acquisitions (M&A) activity in the metals sector slowed in Q2 2018, in tandem with an escalation in global trade tensions.

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“Deal activity, particularly crossborder, may remain stagnant until the angst caused by the global trade climate has subsided.” said Brian Kelly, US Metals Deals Leader for PwC.

The value of M&A activity in Q2 ($8.1 billion) fell 51% compared to Q1. Total deal volume (117) in Q2 also dropped, falling 40% compared to the previous quarter. In addition, average deal size ($136 million) was down 30%.

However, in the year to date (i.e. January-June), total deal value was up 72% compared with the same period in 2017. Total deal volume was up slightly (1%), while average deal size was up 4%.

The Asia and Oceania region saw the majority of metals sector M&A activity, according to the report. Among that activity included Baotou Iron & Steel Group, China’s largest steelmaker, announcing the acquisition of Inner Mongolia’s Baotou Steel Union for $1.6 billion.

Source: PwC via Thomson Reuters and other publicly available sources
(1 In Million USD)

“The region accounted for 76% of target value and 84% of acquirer value in the sector this quarter,” the report states of Asia and Oceania. “Similar to the previous quarter, China remains the global leader in steel and aluminum manufacturing. While it is expected that the imposed tariffs on foreign imports will increase local valuations, certain risks remain as economic growth expectations stagnate due to increased trade risks.”

In particular, deals in the steel and aluminum categories suffered. This spring the U.S. imposed tariffs of 25% and 10% on steel and aluminum, respectively, with a select few countries managing to negotiate quotas (South Korea, Argentina and Brazil).

“Deal values in the Steel and Aluminum categories are 38% and 90% lower than last quarter, respectively,” the report stated. “Deal values in the Iron Ore and Other Metals categories were higher from last quarter helping offset this decline. Deal volumes were significantly lower in all categories.”

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For now, a recovery in deal activity waits, in part, on some sort of resolution to the rise in global trade tensions.

“Until the results of these geopolitical trade relations become more clear, cross-border deal activity and overall deal value in the Metals sector may continue at below recent historical average levels; despite steadily increasing global demand and other economic stimulus,” the report explains.

Steel giants Tata Steel and thyssenkrupp have been talking about it since 2016, but now they have finally managed to reach an agreement to merge their European operations into a 50-50 joint-venture, according to the BBC.

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The merged business, to be called thyssenkrupp Tata Steel, will have annual sales of about £13 billion (U.S. $17 billion) and be able to produce 21 million tons of steel per year. The delays in reaching an agreement have in part been due to intense union lobbying to protect the two companies’ 48,000 workers.

The agreement is said to protect jobs with no compulsory redundancies for the next eight years, according to The Telegraph. While no compulsory redundancies have been agreed upon, the tie-up is expected to lead to about 4,000 voluntary redundancies as overlaps are eliminated between the three main hubs of the combined group – IJmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales — with the head office based in the Netherlands.

It is hoped the merged group will make cost savings of between £350-£440 million a year (approximately U.S. $520 million), although unions have secured an agreement for the first £200 million of operating profits to be reinvested back into the business. thyssenkrupp Tata Steel will be the second-largest steel producer in Europe after ArcelorMittal and it is hoped its size will help it compete against rising competition from Chinese imports (made worse by President Donald Trump’s recent imposition of a 25% import tariff on steel made in the European Union).

Heinrich Hiesinger, thyssenkrupp CEO, is quoted by the BBC as saying even prior to the U.S. import duty the two companies needed to consolidate and become more efficient because of increasing pressure from imports and an overcapacity within the industry. The loss of the two companies’ largest export market just makes matters worse.

The consequences for the combined group’s profitability in the event of Brexit have not, at least publicly, been discussed, probably because no one knows what the impact will be on moving products and people across borders post-Brexit. The only comment from the company came from Tata Steel UK CEO Bimlendra Jha who said it would be a “sorry state of affairs” when asked what a hard Brexit would mean.

Importantly, it gives the two companies an increased scale and opportunity to achieve some economies as a result.

Steel prices have picked up this year. Generally, Europe’s steelmakers are doing better, but they face considerable uncertainty as to the impact and duration of the current U.S.-European trade conflict, the level of increased Chinese imports and the possible impact of Brexit.

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All in all, the merger may prove timely; the challenges ahead are many.

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This morning in metals news, ThyssenKrupp and Tata Steel have come to a final agreement on their joint venture deal, Canada hits the U.S. with tariffs on $13 billion in goods and President Trump says he will not agree to a new deal on the North American Free Trade Agreement (NAFTA) until after the midterm elections.

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Making a Deal

In September 2017, Indian firm Tata Steel and German firm ThyssenKrupp announced they had signed a memorandum of understanding to merge their European steel operations, thus forming the No. 2 steelmaker in Europe (behind ArcelorMittal).

Almost a year later, the two announced they have reached a final deal on the merger, Bloomberg reported.

However, according to the report, some of ThyssenKrupp’s biggest investors are arguing the deal is skewed in Tata’s favor.

Canada Hits U.S. With Tariffs

The trade tensions continued apace, as Canada announced it was placing about $12.5 billion in tariffs on U.S. goods.

According to CNN, more than 40 steel products will be hit with a 25% duty, while over 80 other products will get a 10% duty.

Trump Says No Deal on NAFTA … Until After Midterms

Talks about NAFTA have somewhat fallen under the radar in recent weeks, as heated debate regarding immigration and the Supreme Court Justice Anthony Kennedy’s retirement announcement have dominated headlines.

As for the 24-year-old trilateral trade deal, President Trump indicated that he will not sign a new NAFTA deal until after the midterm elections in November, the Washington Post reported.

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In other NAFTA-related news, Mexico has chosen a new president, as leftist candidate Andrés Manuel López Obrador — typically known simply as “AMLO” — won Sunday’s election by a landslide.

Rio Tinto Iceland Ltd (ISAL). Source: ISAL/Einar Aron Einarsson

Norwegian firm Norsk Hydro announced Monday that it had put in a bid for Rio Tinto‘s aluminum plant in Iceland, according to a company release.

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“We see great potential in exchanging competence and technology elements between our aluminium plants,” said Hilde Merete Aasheim, head of Hydro’s Primary Metal business area, in the release. “We are now running a technology pilot in Norway which aims to be the world’s most energy-efficient and climate friendly aluminium production facility. These innovations will be expanded to other Hydro facilities, and as part of Hydro, ISAL will benefit from such technological spin-offs and competence.”

The bid came in for $345 million, according to a Rio Tinto release. Following the conclusion of a consultation process, Rio expects to ink the deal in the second quarter of this year, according to the Rio announcement. The bid for Rio’s 100% stake in the Iceland Ltd. (ISAL) plant also includes Rio’s stakes in the Dutch anode facility Aluchemie and Swedish aluminium fluoride plant Alufluor.

“The binding offer for the sale of these assets provides further evidence of Rio Tinto’s commitment to strengthen our business and deliver value by streamlining our portfolio,” said Alf Barrios, Rio Tinto Aluminium’s chief executive, in the release. “Hydro has a solid track record in the aluminium industry and is a partner to Rio Tinto in other ventures. ISAL, Aluchemie and Alufluor are a natural fit with Hydro’s portfolio and this transaction should secure the long term future for the sites and continued economic benefit for the wider communities.”

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Hydro cited the acquisition’s reinforcement of the firm’s position as a European supplier of extrusion ingot, and touted the ISAL plant for its production based on renewable energy. According to the announcement, ISAL’s 210,000 mt of aluminum produced with renewable power would increase Hydro’s capacity in primary aluminum production to 2.4 million mt in 2018. In addition, Hydro’s share of production from renewable energy sources would rise to over 70% with the acquisition, according to the release.

Steel is the buzzword in India these days.

In addition to increased uptake, the revival in the steel cycle has also led to an unlikely output – many steel majors are now showing renewed interest in acquiring stressed Indian steel assets that have been put on the block for loan default.

Now, Indian steel is seeing an uptick in sales after almost a decade.

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The renewed interest in steel plants that are in a financial mess and have been put up for suitors is logical, analysts say, since most are going for approximately U.S. $600 per ton, while the rate to set up a new steel plant is almost about U.S. $800 per ton. Not to mention that buying an already up and running steel company means no hassles of taking government and other permissions.

What adds icing to the cake is many of these stressed assets are on the block for nothing else than the fact that most were set up at high costs, and other operational reasons.

Foremost in the race is Tata Steel Ltd., with its highest bid for the insolvent Bhushan Steel Ltd. and Bhushan Power & Steel Ltd. The former has offered to pay up to about U.S. $ 7 billion (Rs 45,000 crore) for Bhushan Steel and about U.S. $3.7 billion (Rs 24,500 crore) for Bhushan Power. Others are Numetal Mauritius, a company having VTB Bank as a majority shareholder and the Ruias as a minority partner, and ArcelorMittal for the stressed Essar Steel. Tata’s last major acquisition was the U.S. $13.5-billion Corus deal in 2007.

Tata Steel currently has 13 million tons per annum (MTPA) capacity; if it managed to grab the two Bhusan plants, it could add about 8.0 MTPA.

Bhushan Steel was sent for debt resolution by its lenders after the company failed to repay its dues worth about U.S. $8.62 billion (Rs 560 billion) under the Insolvency and Bankruptcy Code 2016.

But according to a report in The Hindu Businessline, there is now one hiccup in Tata’s path.

Bhushan’s lenders have invited the U.K.-based Liberty House to also submit its bid for the assets, well after the deadline, which was Feb. 8 this year. Only JSW Steel and Tata Steel had submitted bids by the deadline.

Quoting a Liberty House spokesman, the report said it had been invited by the lenders to bid for both the Bhushan assets, and would be doing so within a fortnight.

When asked why the company had failed to bid before the deadline, the spokesperson said Liberty House had been finalizing its India strategy.

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In mid-February, ArcelorMittal India Pvt Ltd (AMIPL) submitted its offer for Essar Steel, which includes a detailed investment plan to address the operational issues in Essar’s existing asset base. The company has expressed confidence that with its industry expertise and “renowned operating prowess,” it was best equipped to implement a successful turnaround, which would be beneficial to Essar’s stakeholders.