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Lakshmi's gamble(Economist.com Via Thomson Dialog NewsEdge)Mittal Steel, the world's leading steel producer, has led consolidation in the industry by hoovering up smaller firms. Now an audacious 18.6 billion bid for Arcelor, the second-largest steelmaker, could forge a global giant and encourage yet more consolidation THERE is no doubting the ambition of Lakshmi Mittal. His family only took to the steel business in 1975 with the purchase of a small plant in Indonesia. Since then, the Indian-born but London-based tycoon has built Mittal Steel into the world's biggest producer. His family owns 88% of the firm and Mr Mittal has become one of the richest men on the planet. But not content with running an empire that produces over 65m tonnes of the metal a year, on Friday January 27th he launched an unexpected and audacious bid to become a near-unassailable giant. He made an unsolicited offer of 18.6 billion ($22.8 billion) in cash and shares for Arcelor, the world's second-biggest steel firm. If successful, Mr Mittal will forge a vast steelmaker nearly four times bigger than its nearest rival. Under the terms of the deal his family would keep a controlling stake in the expanded steelmaker. However, Arcelor is not keen to become a mere part of a steelmaking behemoth. Guy Doll, Arcelor's chief executive, described the bid as 150% hostile after his firm's board rejected the offer on Sunday. Mittal's chances of getting its hands on its nearest rival were not improved by the reaction of the French government, which in 2001 pushed for the merger of leading steel firms in France, Spain and Luxembourg that created Arcelor. France does not have a stake in Arcelor but its government still voiced concern over the hostile nature of the bid. The governments of Luxembourg and Belgium, which both own a slice of Arcelor, also expressed doubts about the approach. Mr Mittal may yet conclude that the deal will prove too troublesome to pursue. Even before the bid for Arcelor, Mittal led the transformation of the industry. Once dominated by poorly managed and inefficient state-run firms that were protected behind trade barriers, now it is globally integrated and profitable. Since 2003 China's appetite for steel, for its fast-expanding economy, has pushed up prices and swelled producers' coffers. In turn, cash-rich firmsled by Mittalhave been pouncing on each other, encouraging consolidation in the industry. But despite the mergers and acquisitions, the world's top ten steelmakers still only control around a quarter of world sales. Mr Mittal always believed that the industry would come to be dominated by a handful of big firms, each producing over 100m tonnes of the metal a year. But if his bid for Arcelor succeeds, the new firm would be of staggering size, with a tenth of the world's steel trade, production at 115m tonnes a year, likely annual revenues of $69 billion and some 320,000 employees. It would dwarf the next-largest firm, Japan's Nippon Steel, which produced just over 30m tonnes in 2005. Mittal overtook Arcelor as the world's largest steelmaker after buying America's International Steel Group in 2005. Since then it has snapped up a number of steel mills in eastern Europe. Late last year it paid about $4.8 billion for Ukraine's state-owned Kryvorizhstal. Mittal's move on Arcelor comes just days after the Luxembourg-based target had itself won a bidding war for a smaller steel firm: last week Arcelor concluded a deal to pay just under $5 billion for Dofasco, a Canadian steelmaker that produces some 5.5m tonnes a year, trumping an offer from Germany's ThyssenKrupp. If Mittal wins its bid for Arcelor, it has undertaken to sell Dofasco to the German firm, perhaps not relishing the prospect of absorbing two new firms into its existing business. The wave of mergers and acquisitions has helped to cut the chronic overcapacity that troubled steel firms for decades. But by far the biggest factor in the resurrection of the steel industry is China. It now consumes and produces some 30% of the world's steel. Chinese demand pushed up the price of a hot-rolled coil to nearly $600 a tonne a year ago, though it has now slipped back to around $450. Fears of a glutBut could China's booming steel production cause a glut on the world market and a slump in prices? In 2005 China produced 349m tonnes, nearly a quarter more than the year before. Its expansion is set to continue. If China becomes a significant exporter, prices could crumble. There are signs that Chinese production is likely to increase: China's government is intent on consolidating its fragmented domestic industry to create, by 2010, two steelmakers each with capacity of some 30m tonnes. On the other hand, say more sanguine observers, China's competitiveness is limited because it has little access to raw materials at home so must import expensive ore and coking coal purchased on the world market. If Mittal acquires Arcelor it may be well placed to bargain with customers and suppliers and thus ride out any slump. Three suppliers dominate the global market for iron ore and coking coal. In 2005 they raised prices sharply. Further, smaller increases are likely this year. Scale will confer on Mittal more power to resist price hikes. Furthermore, a combination of the mining activities of Arcelor and Mittal will foster self-sufficiency. Mittal claims that the new firm will expand its iron-ore operations to supply half of its own needs by 2010. But doubts may remain over the price that Mittal is prepared to pay. Steel is a notoriously cyclical business, even without the added dangers of China flooding the market. The offer represents a premium of 27% over Arcelor's current market value. And there are other potential pitfalls, apart from the resistance of the European governments that have an interest in Arcelor's future. Competition authorities are sure to take a close look at the emergence of a firm of such size. However, the Mittal family has proved adept at managing steel assets to date. And where it goes, others are sure to follow. Shares in other big steel firms soared at news of the offer. More consolidation is a certainty, even if this giant bid does not succeed. And if it does? The rest of the pack will struggle to keep pace with the industry's leading light. |