Steel industry boom was bust for refractories industry. (Credit: Penn. Legacies Project)
The steel-industry report in Iron & Steel Technology magazine’s Dec. 2008 issue documents some of the bad news that members of ACerS’ Refractory Ceramics Division are probably already aware of. The report – issued by World Steel Dynamics, the information-services firm that authors a monthly column on steel for IST – says that during the (now fading) recent steel sales boom, steelmakers experienced “rejuvenated financial positions,” and “soaring EBITDAs.” Steel mills outside of China were particularly flush and generating “huge cash flows on the order of $60 billion in recent years, versus a negative $1.3 billion in 2001,” WSD reports.
Most steel firms didn’t use their cash to build new mills, expand capacities or make major capital improvements. Instead, steel’s strongest players plowed (or are plowing) their profits into mergers and acquisitions, causing continued industry contraction and consolidation, WSD says. The report foresees the “urge-to-merge” continuing at “a high rate over the next decade, no matter what the industry circumstance.” By 2015, WSD predicts, “five to 10 companies with a capacity range of 50-150 million tonnes” will control much of the market.
The poster boy for mergers and acquistions is Lakshmi Mittal, chairman and CEO of ArcelorMittal, a steel company operating in 24 countries. “Via a series of bold moves, Mittal created the world’s largest steel company in just 16 months and gained the distinction of being the first of the expected 50-to-150-million-tonne behemoths,” WSD says. Meanwhile, Mittal recently announced it was indefinitely laying off 16 percent of its U.S. workforce cutting U.S. output by 40 percent.
Prime acquisition targets in China, India: China may have the most acquisition targets. “WSD believes, in a few years, Chinese central government policymakers will change their minds and permit some of the leading Chinese mills to merge with their offshore competitors,” the I&ST article counsels, calling China’s steel mills “outstanding acquisition or merger candidates.”
Globalization changing ownership patterns: Globalization is also impacting the steel scenario. WSD expects “more technical and marketing agreements” to take place, as steel companies scramble to “engage in alliances and joint ventures” that will change industry ownership patterns. As a result, WSD sees steelmakers “evolving and consolidating” into two types of firms:
● Global players – firms selling product on a high-tonnage and value-added basis, contracting prices annually and marketing to customers with manufacturing operations in multiple countries.
● Domestic players – firms selling a “far greater proportion of less value-added products on a lower-tonnage basis” and determining prices in the “spot market.”
Another blow for refractories: Industry consolidation is “good for steelmakers,” the WSD report says, because it enhances their pricing power and production control. For beleaguered refractories vendors – already squeezed by previous industry contractions, raw-material shortages, global competition and skyrocketing financing, energy and transportation costs – a new surge in steel-industry contraction is just one more cross they will have to bear. While refractories have benefited from previous steel booms, the industry is unlikely to reap large-scale prosperity in an “urge-to-merge” market where, according to WSD, the prevalent steel-industry attitude is “it’s cheaper to buy than to build.” What lies ahead? WSD says cash being diverted to M&A means “less funds will be spent to create excess capacity,” expansion “may be more limited than in the recent past,” marginal steel companies will “find it harder to survive” and not to expect “many export-oriented steel plants to be built in the next five to 10 years.”