The Hindu Business Line : Changing dynamics in steel sector

For Tata Steel, which has put through two acquisitions in the Asian region, the speculated move into Europe may be the next logical step in the value chain.

Mittal Steel has always believed that a global business model is logical for the steel industry. In the flat market, particularly our customer base is global and we need to be in a position where we can offer them product solutions globally.

— Mr Lakshmi N. Mittal, Steel Success Strategies, New York, June 21, 2005

A year later, the Mittal-Arcelor merger has inexorably altered the dynamics of the steel industry. Tata Steel's widely speculated and audacious bid to pick up a large stake in the world's seventh largest steel-maker, Corus, that may have been considered implausible a year ago, now seems to be in the realms of possibility.

With the revenues and production capacities of Corus being at least three times larger than Tata Steel's, the prospect may still appear outlandish, but since the Mittal-Arcelor deal, the strategic logic dictating `consolidation' in the highly fragmented steel industry is compelling. Combating cyclicality by calibrating supply to global demand, shifting the bargaining power in raw material sourcing from the ore producers back to the steel-makers and gearing for the structural change imposed by China, which controls 350 million tonnes of steel (or 25 per cent of global capacity), are said to be the three key drivers of consolidation moves by the top 10 global steel-makers.

Among the next five largest steel-makers, Posco has evinced interest in acquisitions in Asia, including China; Thyssen Krupp recently allocated over $10-billion for growth initiatives, including acquisitions; and Baosteel is pushing consolidation in the highly fragmented steel capacities in China.

Strategic benefits

Will they or won't they? That will be the question dominating market interest the next few months, as the Tata group has indicated to the stock exchanges that it is reviewing several inorganic options, including Corus. For Tata Steel, which has put through two acquisitions of NatSteel, Singapore, and Millennium Steel, Thailand, moving into the European geography through an acquisition may be the next logical step in steel value chain. And second, this acquisition will catapult Tata Steel to the top 10 steel-makers globally.

If this deal materialises, it will make strategic sense for Corus and Tata Steel in two ways:

High raw material costs: Corus currently has three key divisions: Strip products, long products and distribution/building systems. In August it sold its aluminium rolled and extrusions business to Aleris International to emerge a core steel player. The long products division caters to customers in construction, industrial applications, railways and engineering steels.

Corus has been dogged by high raw material (and consumables) costs, which accounted for over 40 per cent of its operating costs, compared to a sharply lower percentage for Tata Steel. This also accounted for Corus' operating profit margin (OPM) being in the high single digits, compared to Tata Steel, whose OPMs were at least two-and-a-half times higher.

If Tata Steel can offer access to low-grade slabs from its existing plants in India or through its two acquisitions of NatSteel or Millennium Steel, it will fall in line with its objective of making primary steel in low-cost facilities such as India and establishing finishing facilities in the end-user markets.

Access to Europe: Considering that Europe and the US are likely to be heavy users of steel, at least for the next five to seven years, Corus is likely to offer Tata Steel a distribution gateway into the European markets.

Through the Corus acquisition, it is likely to strengthen its long products portfolio strongly.

This will also fit in with the grand plan of Tata Steel to operate from multiple locations and have a steel portfolio that caters to auto and construction.

However, strategic benefits apart, this deal by the Tatas will ultimately boil down to the equity stake that Tata Steel plans to pick up in Corus.

Second, with the Corus stock surging by nearly 30 per cent since end-August and the valuation working out to seven times the EBITDA (earnings before interest, taxes, depreciation and amortisation), may prove to be a fairly stiff bargain.

Finally, it is the cost savings that Tatas can derive from the exercise that will define the dynamics of this deal.

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