The Hindu Business Line : A steely catalyst

The audacious takeover bid mounted by Mittal Steel in late January for European steel giant Arcelor is close to culminating in a momentous triumph for the Indian-born British steel magnate, Mr Lakshmi Niwas Mittal. Even going by Mr Mittal's ferocious appetite for acquisitions that has made him the world's biggest producer of steel, this deal represents a seminal moment in his career. For Arcelor, it is an irony that a company created through a merger of French, Spain and Luxembourg steel producers, in the first major wave of steel consolidation in 2001, should itself fall prey to that inexorable market force. The defensive move planned by Arcelor in May to merge with Severstal, a Russian steel producer, primarily to fend off the Mittal bid, was always a sub-optimal choice for the shareholders of the European giant.

As the Mittals uncork the champagne, they will realise that the strategic logic surrounding this combination is compelling. While Arcelor is strong in Western Europe and in high value-added products, Mittal Steel's strengths lie outside the EU and in lower grades of steel. They, thus, complement each other well, across product lines and in geographic footprint. In an industry dogged by chronic but highly fragmented overcapacities, this combination can offer unrivalled scale economies and efficiencies to control costs and increase margins. Though the Arcelor-Mittal combination, with control of only a tenth of global steel production, may not have the power to reduce the volatility of prices across a commodity cycle, it has the potential to trigger events that can change the course of the steel industry. One, this combination will force the next five players — Nippon Steel, JFE Steel, ThyssenKrupp, Baosteel and Posco — to consider consolidation strategies if they are to compete with it on a somewhat equal footing. Two, in raw material sourcing, especially iron ore, the bargaining power is likely to balance out or switch back to the steel-makers from the ore producers, who had been calling the shots the past two years. Finally, with plants spread across the developed world, the Arcelor-Mittal combination, which will be three times larger than its nearest rival, Nippon Steel, may be in a better position to calibrate supplies to global steel demand.

The wild card, however, in this equation will be China. With over 350 million tonnes of steel capacity (or 25 per cent of global capacity), it can destabilise prices if it starts exporting to the developed world. Such a possibility exists if the Chinese economy were to start slowing, say beyond the 2008 Olympics. This offers Arcelor-Mittal and other top steel producers a two-year window to move into Asia, to counter the Chinese challenge. And that will set the stage for the next round of battles in the steel sector.

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