May 26, 2006

China’s influence growing in global steel industry

TORONTO

The metals industry continued to consolidate in 2005, as leading producers sought to control the rising cost of raw materials by purchasing their suppliers outright, PricewaterhouseCoopers (PwC) reported this week.

In Forging Ahead: Mergers and Acquisitions Activity in the Global Metals Industry 2005, PwC said further mergers and acquisitions (M&As) activity in the sector is likely, and China will be a significant source of M&As over the next few years as it produces and consumes steel at record levels.

There were 250 metals industry deals in 2005, far surpassing the 166 in 2004. However, the total value of the deals in 2005 was only $35 billion, less than the $37 billion in deals the previous year (all references are to US dollars). The steel sector led the way in 2005 M&A activity in the sector, as it did in 2004, with 165 deals collectively worth $27.4 billion, according to the report.

Domestic transactions accounted for most of the metals industry M&A activity with 151 deals — up from 99 in 2004. However, the aggregate value of these deals was just $17.6 billion, down 32 per cent on the $25.7 billion that was traded the year before. Conversely, both the volume of cross-border deals and their aggregate value rose sharply, with 99 transactions collectively worth $17.2 billion — up 50 per cent over 2004.

Companies based in Central and Eastern Europe, Asia Pacific and Latin America jointly accounted for $17.7 billion — or 51 per cent of the total value of industry transactions worldwide, up from 32 per cent the previous year. This trend is expected to continue, given that industrial production in all three regions is growing much more rapidly than it is in North America and Western Europe.

China now produces more crude steel than the next four largest steelmaking nations combined. The central government has signalled its determination to rationalize the sector, with the top 10 domestic producers controlling 50 per cent of domestic output by the end of the decade. Its new steel policy, launched in July 2005, has already resulted in eight transactions with an aggregate disclosed value of $1.1 billion — 25 per cent of the total value that was traded in the Asia-Pacific metals industry in 2005. China is also attracting great interest from overseas steelmakers eager to tap into its growth.

At the same time, China’s steel consumption has quadrupled since 1998, with the construction industry playing a significant role in driving demand. In 2004, it accounted for 53 per cent of total consumption, a pattern that is likely to persist for the next few years, as China invests in vast infrastructure projects like the Three Gorges Dam and gears up for the 2008 Beijing Olympics and 2010 Shanghai World Expo.

China’s steel consumption is forecast to rise by four to five per cent a year for the next few years, significantly outpacing the three per cent by which consumption is predicted to rise in the rest of the world.

China is heavily reliant on other countries, however, for high-quality iron ore and, as imports have soared, so prices have sky rocketed. Energy and transportation costs have also increased, and the domestic steel sector is highly fragmented and suffering from overcapacity in certain product areas. All these factors have eroded the industry’s profitability - and, if it is to weather such difficulties, it must consolidate.

DCN NEWS SERVICES

Print | Email | Comment