LONDON - It seems everyone's after a piece of Chinese action. While most eyes
are following Mittal's audacious bid for Arcelor - the world's No 1 steelmaker
swallowing up the world's No 2 - that event merely represents the taking of
another pawn, admittedly the strongest yet, in a global game of chess. But
looking beyond this to the next move, it seems clear that the endgame will
finally be played out in China.
Step back and consider this. It took just over 30 years, from 1969 to 2001, for
world crude-steel production to grow by one-third from
570 million tonnes to 850 million. Then along came China's industrial
revolution, triggering an explosive growth in steel consumption. As a result,
world crude-steel production jumped from 850 million tonnes to 1.13 billion -
again, an increase of one-third, but this time it took not 30 years to achieve,
but a mere four years, from 2001 to 2005. And in that time, an extra 280
million tonnes of steel was made in the world - a staggering 200 million
tonnes of which was made in China.
So, taking the chess grandmaster's view of the global steel industry, for a
side that is already strong in Central and Eastern Europe and North America -
such as Mittal - the acquisition of Arcelor, strong in Western Europe and South
America, would make an excellent next gambit. Assuming this move succeeded,
there would then remain just one huge gap in your strategy: East Asia,
and China in particular - the very place where steel consumption is
accelerating faster than the rest of the world put together.
Thus we should not be surprised to learn that a number of leading steel
producers outside of China are already pursuing strategies to engage with China
in various steelmaking ventures and partnerships. Indeed, Mittal already has a
small stake in China's
Hunan Valin and is investigating other possibilities.
Arcelor, too, has been looking for partners in China.
But therein lies the problem. China prohibits equal or majority foreign
ownership in steel companies. So how to get around this? One strategy would be
to create a huge and powerful superplayer, such as a combined Mittal-Arcelor,
with enough heft and market influence to shift the Chinese government's
position on foreign investments and ownership. Only in this way will
"outsiders" be able to establish a firm foothold in the world's fastest-growing
and dynamic steel market.
Consolidation has come late to the world's steel industry. Some would argue
that it remains highly fragmentary. Nevertheless, the pace of global
consolidation in steelmaking is without doubt gathering speed. The chart below
shows the proportion of steel made by the world's top 10, top 20 and top 50
companies. The chart presumes the Arcelor-Mittal deal comes off, which has been
reflected retrospectively in the figures for 2005; the chart also excludes
China, given the ban on majority foreign ownership.
On this basis, the top 10 steelmakers contributed 22% of total steel made back
in 1993, growing to 40% in today's world, presuming a combined Mittal-Arcelor.
Regardless of what
happens with that giant, still-unresolved deal, the concentration of
steelmaking in fewer hands has been a clear trend over the past few years and
some would argue that the fruits of its success in Europe and North America are
already visible with greater market discipline. In other words, consolidation
has helped to gain a better balance between steel supply and steel demand,
leading to greater price stability.
The steel industry has also had to take a lead from the world around it where,
for example, the top five aluminum producers control some 40% of the market.
Consolidation among steel mills clearly gives increased bargaining power with
both suppliers and customers. Already the number of primary iron-ore suppliers
has dwindled to only three, and even scrap suppliers are beginning to form
larger and stronger groups, such as the recent Sims-Neu merger, created to help
maintain a stronger bargaining position with steel mills. And as for big steel
customers, such as the auto makers, there is also a strong trend to concentrate
production in fewer and fewer hands.
Steel-industry consolidation helps to keep new capacity in check as fewer steel
companies means less risk of making duplicate investments, both nationally and
internationally, in isolation from competitors. Hence, for all these reasons,
there has been a rash of acquisitions in the steel sector, by newer companies
such as Mittal, Gerdau and Nucor, as well as by more traditional producers such
as Arcelor, especially in Brazil, and by Severstal.
But the endgame will doubtless be played out in China, where steel
consolidation is already making progress. In 2005, China produced 349 million
tonnes of crude steel, led by Baosteel with 23 million. China's top 10
steelmakers produced 33% of total Chinese crude steel in 2005 - the top 20
produced 50% (172 million tonnes). It's against this surprising background of
increasingly large and less fragmented Chinese steel companies that outside
steelmakers, now feel an urgent need to muscle in.
Another concern to the world outside China is that all this growth in Chinese
steel demand is in danger of creating too much new steelmaking capacity. While
the Chinese central government may argue for more consolidation, a lot of power
remains at local regional levels. The competition among different regions also
provides a recipe for duplicate investment plans and hence excessive
steelmaking capacity.
If such new capacity were then to exceed domestic demand, there's the growing
prospect of China exporting some of the excess capacity - a trend we have
already seen in the last few years, when China came seemingly out of nowhere to
become one of the world's top steel-exporting countries. Given that Chinese
steelmakers are now beginning to upgrade their products into more value-added
steels, and also concentrating on cost reduction, it's likely that in a few
years' time, China could have a very attractive array of products, in terms of
both quality and price, on the world market.
As the saying goes, "If you can't beat them, join them." The endgame for the
world's steelmakers may be that their survival is better served, not on the
outside of China looking in, but to have a powerful presence on the inside of
China, looking out.
Steve Mackrell is the operations director at the Iron and Steel
Statistics Bureau (www.issb.co.uk), the leading producer of steel industry
statistics in the United Kingdom.
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happens with that giant, still-unresolved deal, the concentration of
steelmaking in fewer hands has been a clear trend over the past few years and
some would argue that the fruits of its success in Europe and North America are
already visible with greater market discipline. In other words, consolidation
has helped to gain a better balance between steel supply and steel demand,
leading to greater price stability.
