Steel overcapacity will fuel consolidation, says report

CBC News today has the following steel industry report. 

TORONTO (CP) - The need to cut overcapacity in the steel sector is expected to fuel more mergers and acquisitions, a report by accounting firm PricewaterhouseCoopers suggests.

The report released Thursday said there were 117 deals in the steel sector in 2004 worth $31.4 billion and the trend is expected to continue. James Forbes, global metals advisory leader for PwC, said the steel sector must continue to consolidate for competitive reasons.

"Greater market concentration will give individual steelmakers many more opportunities, such as increased bargaining power with suppliers and customers, and increased operating flexibility," Forbes said in a release.

"It will ultimately ensure they are better able to survive, should iron ore prices keep soaring." Iron ore is a key ingredient in steelmaking.

In April, Mittal Steel Co. became the world's No. 1 steelmaker after acquiring U.S.-based International Steel Group in a $4.5-billion US deal. The company, which is 88 per cent owned by the Mittal family, has steel-making facilities in 14 countries and about 180,000 employees.

Meanwhile, Canada's major steelmakers have been bucking the consolidation trend. This month, Sault Ste. Marie-based Algoma Steel (TSX:AGA) concluded a search for a buyer with no results. CEO Denis Turcotte said the company's search for a suitor coincided with a downturn in steel prices, leaving Algoma without any offers at a sufficiently attractive price.

Earlier this year, Hamilton-based Stelco Inc. (TSX:STE.A) rebuffed numerous takeover offers from suitors including Russian steel giant OAO Severstal. It has decided to forge ahead with a restructuring plan that will see it emerge from bankruptcy protection as a stand-alone company.

Thursday's report also suggested some of the larger steel producers may decide to buy their own iron ore or coal mines to hedge against price volatility in raw materials.

In June, Dofasco Inc., which sits next to Stelco in Hamilton, said it was paying $306 million for the two-thirds of Quebec Cartier Mining Co. it didn't already own.

Montreal-based Quebec Cartier operates an open-pit iron mine in Quebec's North Shore region and already locked in contracts for all of the iron ore it will produce this year and next.

PwC suggested the global aluminum sector is at a different stage of its evolution than steel, having already consolidated to a much greater extent than steel.

Forbes said the top five aluminum producers have nearly 40 per cent of the total market, double the share enjoyed by the top five steelmakers.

"These two key sectors of the metals industry are at quite different stages in their market development cycles, but both are likely to experience further buoyant levels of M&A activity over the next few years," he said.