Steel

Big Steel – Getting Bigger

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Ferrous Metals, M&A Activity

Editor’s Note: This is the first of a two-part series

I was reading an interesting article the other day in that most informative of publications, the Economist, about the rise Lakshmi Mittal. Mittal has become the world’s fifth richest man worth some $37b principally through his 43% stake in the world’s largest steel maker ArcelorMittal. Mittal didn’t exactly start from scratch in building his global empire, daddy got him kick started with a new steel mill in Indonesia in 1975 but even so his rise has been spectacular. It’s more akin to a Silicon Valley business than a mature industry like steel making. Mittal really hit the big time in October 2004 when he purchased the consolidated steel assets of Wilbur L Ross’ International Steel Group for $4.5b and in the process became the largest steel maker in the world. A position enhanced further by the merger with Luxembourg based Arcelor in 2006 (can it only be 2006, it seems longer ago, so commonplace has the merged company’s name become in just 2 years). Typically such a rate of acquisition would be funded by massive debt but with AM’s that has not been the case. You may say $22b is a mountain of debt in anyone’s language but when taken in the context of $105b of sales and $19b of EBITDA profit it’s not excessive. So how has he done it?

Timing is in part the answer. When Wilbur Ross purchased the rusting assets of LTV, Bethlehem Steel and Weirton starting in 2002 it was after the US steel industry had gone through 35 bankruptcies in five years. He paid $2b for those assets, worked his magic reducing costs with the unions and offloading pension liabilities and two years later sold International Steel Group to Mittal doubling his money in the process. Since then the steel industry has been driven by unprecedented demand from China and all steel assets (and profits and cash flow) have been headed north. Even the UK’s sick man Corus has managed to make money during this time.

May be Mittal’s biggest achievement is getting all these disparate once individual and autonomous plants working as a single entity. Not just in the US but in Eastern Europe and later with Arcelor. In his own words part of that was down to the nature of the businesses he bought along the way, both ISG and Arcelor were themselves the product of earlier consolidations in the industry and by the time Mittal came along the plant managers and corporate bosses were used to change. Apparently it didn’t scare them like it so often does with well established mature industries. Even so the rapid re-branding and integration of these different companies deserves study as an example in successful change management as much as it does in entrepreneurial money making.

–Stuart Burns

My husband bought a box of cereal a few weeks ago promoting the fact that it was 75% organic. Never mind what the remaining content contained. Always the skeptic, I expect that a good percentage of these marketing claims are just that…”claims”. Over on SpendMatters editor Jason Busch joked that L’Oreal (the make-up company) had been planning some cost reduction strategies. I posted a comment joking that they are likely using re-cycled plastics (to lower costs of course) and then get to slap the “environmentally friendly, green label” to the product line and charge me more in the process.

But these ploys are just for consumer products right?

Apparently not. According to this Popular Science article, industrial products companies are praising the virtues of Titanium. But the substance does not appear to back up the hype. Steel doesn’t command a price premium. What kinds of items are we talking about? Master Lock locks and golf clubs, two products heavily associated with Titanium.

I got a chuckle out of the simple experiments the author deployed to check authenticity of said products. Essentially, “hold any genuine titanium metal object to a grinding wheel (even a little grindstone on a Dremel tool will do), and it gives off a shower of brilliant white sparks unlike any softer common metal” and you know you are dealing with the real thing. If however, you see shorter yellow sparks this may just be stainless steel. And no sparks may be aluminum. Next time you are at Home Depot thinking about a bike lock, you might just consider the house label.

–Lisa Reisman

BHP Billiton, the world’s leading diversified mining company, tried to win over smaller rival Rio Tinto through a hostile bid last week to create the world’s third-largest corporation,  behind Exxon Mobil and General Electric. The proposed corporation would become  what Purchasing.com calls “a mining giant worth approximately $400 billion and possibly  … the world’s largest iron-ore supplier” — or, at the very least, a formidable opponent for Vale of Brazil, the current top supplier of iron-ore. A merger could also create the world’s largest producer of copper and aluminum. Despite a 3.4-to-1 takeover offer, however, Rio Tinto seems to have little interest in the deal at its current value. Rio Tinto chairman Paul Skinner wrote a letter to shareholders on Monday explaining the board’s view, noting that the current  unsolicited bid of $147.4 billion  undervalues the company and its stronghold. He stressed that no action is needed on behalf of the shareholders. A copy of the letter can be found online through various news outlets, but here are some quick excerpts:

— “BHP Billiton’s offers, while improved, still fail to recognize the underlying value of Rio Tinto’s assets and prospects.”
— “Our plans are unchanged and will remain so unless a proposal is made that fully reflects the value of Rio Tinto.”
— “BHP Billiton’s announcement is not a firm offer for your shares or ADRs (American Depository Receipts). There is currently no formal offer to consider. You do not need to take any action.”

BHP already increased their  bid to give Rio shareholders 44 percent  of the combined entity rather than the 36 percent  they offered in November. If  a mere half  of Rio shareholders endorse the bid, a hostile takeover could occur. Don Argus, BHP Billiton chairman, released his own letter this week, sending a forceful message to  his company’s shareholders. In the letter, he  told  BHP shareholders, “The offer we have made [to Rio Tinto] is both compelling and responsible and, very importantly, is value enhancing for you.”

The inner workings of the possible deal and legal arrangements between these dual-listed companies tend to be complicated, as the International Herald Tribune disclosed this week. The above-linked article describes a diverse assortment of separate legal arrangements in Australia, Great Britain, and the U.S., all of which will be necessary for these international companies to come to a complete agreement.

Earlier this month, China’s steel sector responded to fears of such an agreement. State-owned Aluminum Corp. of China (Chinalco) decided to purchase a hefty 12 percent of Rio Tinto’s London shares, accounting to nine percent of the entire company, with help from Alcoa Inc. Approximately $14 million was spent on this foothold, which Chinalco hopes will not only prevent the birth of an imposing super giant  — this will be no fledgling infant, as a combined BHP/Rio company could control more than a quarter of the world’s iron-ore  — and diversify Chinalco’s focus.

Similarly, the International Iron and Steel Institute  recently announced that a merger between Rio Tinto and BHP Billiton should not be allowed. The merger, they say, is not in the public interest and would likely create a monopoly.

London-based Rio Tinto will release its full-year earnings this morning at 6 a.m. local time. Bloomberg predicts that second-quarter earnings have amplified, estimating, “[Rio Tinto Group] may report second-half profit rose 9.4 percent because of record iron-ore production and its $38.1 billion acquisition of Alcan Inc.” The figures released today could have a dramatic  effect on the future of the company and its role with BHP Billiton.

Readers, what do you think? How will this play out? How should each company respond to the situation? As always, we would love to hear your thoughts in our comments section.

–Amy Edwards

Update: Rio Tinto Group earnings for 2007 are now available online. –AE

There’s an age-old adage that one thing is constant ” and it’s change. No, I’m not leading into politics and the 2008 presidential election in the States. Rather, let’s think beyond Super Tuesday and look to the metals industry. With all of the  metals industry’s longstanding practices, are there really ways for metals and metals-related processes and purchases to become eco-friendly? Rest easy, because the answer is a resounding yes. In fact, the metals industry is the vibrant host to several new ecologically aware innovations, and they might be the key to sustainable growth and development. Read more

Several weeks ago, we published an article titled Industrial Economic Signals: Down But Not Out. At that time (January 4, to be exact) everyone was speaking the “R” word but the indicators weren’t saying it was so. We’ll know in a couple of days what the indicators are telling us for the month of January but if you pick up any local paper (I picked up Crain’s Chicago), you can’t go to far without reading headlines such as, “Winded City market mahem, recession darken local business mood”. The story goes on to describe a local castings company whose revenue has dropped by 15% while customers were demanding 15% cost reductions ‘or they would move their business to China or Mexico’ according to the article. (Have at it, we would say as the owner of that business….you aren’t going to get 15% savings out of China these days but we’ll leave that rant to another post.)

Back to the headline at hand. Wall Street, according to a recent Purchasing article, basically feels that prices of steel will increase sharply in Q1 “due to increased buying by service centers, benign imports, and increased export opportunities.” The article quotes Michael Willemse, the industrial products research analyst at CIBC World Markets, as saying, “these factors will offset weak end-market demand in North America” and allow the mills to get $660-$680 prices for March deliveries. The article goes on to say that many of the steel analysts in the last month believe the price of steel is set to rise.

But what goes up must come down. And in this case, we could see supply side cost increases pushing up prices in the first half of the year but weak demand would mean they wouldn’t stick. And we said that back in December when we first launched this blog. Read more

While the rise in iron-ore prices will hurt steelmakers without their own iron resources, steelmakers with their own iron-ore are possibly about to hit payday ” along with company investors. OneSteel of Australia, for example, was recently featured in an Andrew Harrison article in the Wall Street Journal as one of the few steelmaking companies that won’t be affected by the higher prices of iron-ore. Approximately 98 percent of iron ore is used to make steel, and the product is vital to the steelmaking industry. OneSteel is particularly self-sufficient in this regard and, unlike other companies, not left brawling for the critical raw material. Instead, OneSteel boasts of  its own  mines that are basically neighbors to its steelworks site in South Australia.

OneSteel, Australia’s second-largest steelmaker, isn’t your typical steel company, reports One Steel Chief Executive Geoff Plummer. Formerly part of BHP, OneSteel became an offshoot from the company in 2000, two years before the largest steelmaker in the country, BlueScope Steel, did the same. Rather than just making steel, Harrison explains in his article, OneSteel is one of the few global steelmakers involved in everything from iron-ore extraction to scrap recycling and product distribution. Since it’s rumored that iron-ore prices could soar as much as 50 percent this year,  the company  —  with its mines, durable assets, and quality management —  is looking like a win to investors.

Since not all companies are blessed with their own mines, other groups are taking  more unique  approaches, looking to new and unusual places for iron-ore. Mining and resources group Rio Tinto is also getting involved in the iron-ore situation, as was noted in a recent article in The Australian. The article declared that Rio Tinto is looking to do what its rival BHP Billiton has failed to do — develop a new iron ore export business out of India despite that Government’s focus on husbanding ore for local steel production. This looks to be a fascinating possibility, particularly after reports that Chinese steel mills are losing negotiating prices with miners. The more possibilities, the better, some might say. But steelmakers such as OneSteel have it the best, since they can find iron-ore in their own backyard.

Amy Edwards

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