Online Extra: Steel Goes Shopping
By Michael Arndt
How big is big enough? Over the last five years, Nucor (NUE ) snapped up assets of six other steelmakers, while U.S. Steel (X ) went on a spree of its own, including the takeover of National Steel, the industry's fourth-biggest producer. Together, the two now account for 40% of the nation's steel tonnage, double their market share at the start of the decade. Still, they may not be big enough to last. The steel industry, in a rush that makes the dealmaking by Nucor and U.S. Steel seem glacial, is going global.
The gutsiest consolidator is Mittal Steel (MT ). The London-based company, which began in 1989 with leased mills in Trinidad and Tobago, has grown into the biggest steelmaker in the world, with facilities on four continents. Following its 2005 acquisition of International Steel Group, it's also neck and neck with Nucor in the U.S.
Now, Mittal is pressing a hostile bid for Arcelor, its European arch rival, which has merged its way to second in global output. The takeover would make Mittal almost five times the size of Nucor, and the first to top 100 million tons in annual capacity.
Steel executives argue that their companies simply have to get bigger. One reason is that auto manufacturers and other prized customers are expanding around the globe and they want multi-continental suppliers. Also, because steelmakers are small compared to buyers as well as vendors -- the world's top three iron-ore producers, for instance, control 70% of sales -- they've lacked leverage in negotiating contracts. By bulking up, they hope to gain clout.
With fewer players, the industry also should be less inclined to flood the market when prices weaken, since big companies can calibrate production more easily than little ones. In addition, larger producers can spread costs out over a broader base. Each acquisition puts more pressure on everyone else to do a deal too -- or get left behind.
U.S. Steel has joined the international movement by buying facilities in Slovakia and Serbia. But the Pittsburgh-based company was outbid in Poland and the Ukraine by Mittal and Arcelor. Nucor, on the other hand, remains entirely a domestic producer. Mittal execs concede they wouldn't be able to purchase either U.S. Steel or Nucor because of antitrust concerns. But many analysts say Arcelor might, if the Luxembourg-based outfit can fend off Mittal, since it has no operations in North America and needs a presence there to round out its portfolio.
LEANING ON CHINA.
While U.S. Steel might fit right in, a takeover could threaten Nucor's much-praised team culture. For that reason, Nucor executives have indicated they want to keep the company independent. Moreover, niche players have proven they can survive in other consolidated industries.
"I think there's room for people like ourselves: Jack be nimble, Jack be quick," says Keith Busse, chief executive of Steel Dynamics (STLD ), who spent 21 years at Nucor before founding his mini-mill in 1993.
As gung-ho as steelmakers are today, however, their premium-priced takeovers could end up looking foolish. The industry's comeback is largely due to China's outsize demand, which has sopped up excess output around the globe. If China's consumption slips, or if its mills begin exporting significant quantities of steel, analysts warn that prices probably would tumble, and newly acquired assets might become unneeded.
For the time being, though, balance sheets and steel prices are strong enough to keep the M&A spree alive.
Arndt is a correspondent with BusinessWeek in Chicago