After being told his steel was an inferior “eau de cologne” when compared with Arcelor’s “perfume”, Lakshmi Mittal, the Indian steel billionaire, showed that in the end he was made of stronger stuff.

Last month, Netherlands-based Mittal won its struggle to take over France’s Arcelor after raising its offer 49% from its original €18.6 billion ($US23.7 billion) bid in January.

The resulting steel giant, Arcelor-Mittal, will have annual production of 120 million tonnes and will control about 10% of the world’s market.

The merger has kicked off a round of consolidation as steel makers hope to sustain fat profit margins by tackling higher raw material costs and prevent steel surpluses when the boom years are over.

In the Australian sector, OneSteel agreed last month to purchase Smorgon Steel Group for about $A1.6 billion ($US1.19 billion).

Arcelor-Mittal reckons that with 61 plants spread over 27 countries and advanced R&D capabilities it’ll be able to tap high-end European car makers while selling less expensive steel to the fast developing countries of Asia and Latin America.

What’s more, it’ll be able to slash some €1.3 billion from its costs. About €500 million of those cost savings will come from raw material purchases.

The rest will come from marketing and manufacturing efficiencies. For their part, OneSteel and Smorgon will trim about $A70 million from costs.

Arcelor-Mittal also plans to move fast with those cost savings. About 40% of the expected synergies will be realised in the first year with 30% coming the year after.

More takeovers may be on the way. Mittal himself is betting the industry will be dominated by two or three companies producing more than 100Mt a year.

Dofasco could be up for grabs if Arcelor backs out of the agreement it made to buy the Canadian steel maker ahead of its Mittal merger.

Japanese steel makers, with their links to Japan’s auto makers, could also be on the radar after May 2007 when new laws there will allow foreign companies to use their shares to buy domestic companies.

Australia’s Bluescope, with its Asian customer base, or South Korea’s POSCO could be attractive to Arcelor-Mittal if the new giant is looking to expand into the region.

Investments

But while a few mega steel makers will inevitably be able to wring lower prices from coal miners, the prospect of customers who are more profitable and efficient is a welcome one, making it easier to plan long-term investments.

At the beginning of the month, Peabody Energy – the world’s biggest private sector producer – announced that it had agreed to buy Excel Coal and its 500Mt of thermal and metallurgical coal reserves for $US1.34 billion.

By 2007, production from the combined operations will more than double Peabody’s current output of 9Mt to around 24Mt.

The acquisition comes amid a period of continuing strong demand for steel. World steel demand is set to grow 7% or 74Mt to 1.087 billion tonnes in 2006, BHP Billiton said last month. Demand will grow another 5.8% to 1.15 billion tonnes next year.

China will underpin the growth. Demand in the world’s most populous country will soar 13% this year to some 356Mt and a further 12% next year to 399Mt, BHP said.

India, which is already the world’s eighth-biggest producer, will continue to be another driver for steel demand.

Of the world’s top 20 steel producers last year, India had the second-fastest growth rate. Production in 2005 jumped 17% to 38.1Mt, according to the International Iron and Steel Institute. Imports there have more than doubled to 3.76Mt over the past four years, the Financial Express reported recently.

There may not be much extra capacity to absorb demand either. In December 2005 the IISI forecast crude steel production capacity would rise this year to 1.305 billion tonnes from 1.184 billion tonnes in 2004, when utilisation was at 88%.

For now, that sort of demand for steel has made it easier for steel makers to pass on the rising costs for raw materials to their customers.

The price of hot rolled steel has tripled in the past five years to about $US670 per tonne in April from a low of $US225/t in 2001, according to UK-based consultancy MEP International. That matches the rise in metallurgical coal prices.

Barlow Jonker’s Japan Steel Mill Hard Coking Coal Index, which is based on the price of BHP Mitsubishi Alliance’s Goonyella brand coal, tripled to an estimated $US115/t for the Japanese business year ending March 31, 2007 from $US39.75/t in the 2000-01 period.

In any case, even if steel makers avoid substituting hard coking coal for cheaper grades, coal only makes up less than a fifth of their costs indicating they may be able to find bigger cost savings elsewhere.

Higher costs of labour, energy and other inputs are clearly taking their toll on some steel makers. On June 29, Bluescope said it would close down its loss-making tin mill in Port Kembla ahead of higher iron ore prices.

Steel giants may also look to invest some of their record profits by buying up smaller metallurgical coal producers to secure access to energy and press for deeper discounts from major coal producers.

Even so, a leaner steel industry with more integrated management structures may be better placed to trim production surpluses when China and India inevitably slow their steel purchases, helping avoid the downturns such as the ones in the early 1980s and again between 1990 and 1995 when world crude steel production slipped 0.5%.

Coal customers may be in a better position to drive harder bargains in the years ahead but that may be the price of sustained and stable growth in the steel industry. Bon chance, Mr Mittal.

Courtesy of www.coalportal.com