The Stel Salaried Pensioners Organization wishes to
thank The Hamilton Spectator for permission to post the following article by
Reporter Steve Arnold, published in the November 24, 2005 edition
By Steve Arnold, The
Hamilton Spectator, (Nov 24, 2005)
The wave of steel
industry consolidation Dofasco has been resisting finally washed over the
company yesterday with an unwelcome, but rich, offer from a European giant.
It's a development
analysts have been expecting for years, and could mark the start of a series of
transactions which take over the entire Canadian industry.
"A large flag
just went up saying, 'The whole Canadian steel industry is in play now,'"
said Peter Warrian of the University of Toronto. "This is a story we're
going to be looking at for the next several months. It's entirely conceivable
that there will be other potential dancing partners coming into the room.
"The industry
has been consolidating globally for three to four years and Canadian companies
don't get an exemption from that."
For the past five
years, the global steel industry has seen a number of forced marriages.
Distressed companies were picked up in bankruptcy after failing to find
partners to finance new equipment, pensions and other costs.
Driving that
pressure has been consolidation among steel industry suppliers and economic
woes for automakers and other customers.
In 2004 alone,
according to a study by consulting firm PricewaterhouseCoopers, there were 117
mergers worth $31.4 billion US in the global steel industry, a 130 per cent
increase from 2003.
Among those mergers
were Arcelor's purchase of a majority interest in Brazilian steelmaker CST and
Mittal Steel's purchase of U.S-based International Steel Group. Mittal and Arcelor
are now No. 1 and No. 2 in the world steel industry.
Despite that trend,
the industry remains highly fragmented with the 10 largest companies accounting
for less than 30 per cent of world steel production. Compare that with the iron
ore business, where three key suppliers control 80 per cent of the world's
seaborne markets and 10 customers account for 80 per cent of the world's demand
for auto-industry steel grades.
Canadian companies
have generally resisted that trend. Dofasco has been fending off overtures from
Arcelor throughout the first half of this year, and Sault Ste. Marie-based
Algoma Steel looked for a buyer earlier this year but didn't find a suitable
suitor.
Stelco has rebuffed
several takeover offers during its tortured restructuring under bankruptcy
protection.
Despite their
reluctance to march to the altar, Arcelor CEO Guy Dolle said the only real
question for small steelmakers in the new world is who their partner will be.
"For all of
this industry, if you want to create value for your shareholders, you need to
have an industry that is much more consolidated than today," Dolle said.
"Canadian steel producers, regardless of their current competitiveness,
are not immune to the forces driving consolidation around the globe.
"For Dofasco,
the question is not if it should join forces with another industry player, but
when, and with whom. We strongly believe that Arcelor is the best partner for
Dofasco and that this is the right time."
Kam Hon, analyst
with Dominion Bond Rating Service, agrees the offer for Dofasco is only the
opening act of a longer drama.
"We can expect
more of this," he said. "Consolidation is going to continue in this
industry until there are only a few giants left.
"A small steel
company is not a viable operation going forward today," he added.
"There will be
smaller companies in the future, but it's going to be difficult for them to
survive."
Despite Dofasco's
reluctance, analysts say the proposed merger could be good for the Hamilton
company, especially since it's between firms that already know each other. The
companies are partners in a joint venture called DolSol Galva Limited
Partnership, a hot-dip galvanizing line in Hamilton.
Dolle said those
advantages include access to Arcelor's slab steel production, which Dofasco
needs for its high value-added auto steels. In return, Arcelor gets the toehold
it lacks in the North American market. It also gains some protection against
rising iron ore prices because Dofasco owns the highly productive Quebec
Cartier mine in Quebec.
Hon sees other
advantages -- Dofasco will benefit by being associated with a large company
with a broad geographic base, ensuring its fortunes aren't tied only to North
America.
905-526-3496
How steelmakers measure up
DOFASCO
* Canada's largest
manufacturer of flat rolled steels
* Founded 1912
* 7,400 Hamilton
employees
* No union,
employee profit sharing instead of defined pension plan
* Annual steel
production, approximately 5.5- million tons
* Third-quarter
earnings -- $5.2-million Cdn, down from $115-million Cdn a year earlier
* Major customers
-- 40 per cent of total shipments are to the auto industry
* Total Shares
outstanding -- 77.4 million
* Share price,
Toronto Stock Exchange -- closed yesterday at $59.05, up 34 per cent.
ARCELOR
* World's
second-largest steel producer, after Mittal Steel Co.
* Leading supplier
of flat carbon steels, with 15 per cent share of the world market
* Created in 2002
by amalgamating three steelmakers, Aceralia, Arbed and Usinor
* 95,000 employees
in more than 60 countries
* Some unionized
workplaces, a range of employee benefits
* Annual steel
production approximately 47- million tons
* Third-quarter
earnings -- $792-million U.S., up from $758-million U.S. a year earlier
* Total Shares
outstanding- 640 million