The Stel Salaried
Pensioners Organization wishes to thank The Hamilton Spectator for permission
to post the following article by Reporter Naomi Powell, published in the
February 4, 2006 edition
By Naomi Powell
The Hamilton Spectator
(Feb 4, 2006)
Dofasco's earnings may have stumbled in the fourth quarter,
but Arcelor SA -- the steel giant that has bid a hefty $5.6 billion for the
Hamilton steelmaker -- hasn't flinched.
Meanwhile Mittal Steel Co. is attempting its own takeover of
Arcelor SA, a move that would create an industry behemoth four times bigger
than its nearest rivals.
Steel takeovers are in the air.
So what's behind the urge to merge?
The answer comes down to purchasing power. Even with the
rapid consolidation of the last few years, the steel industry is still highly
fragmented.
That has weakened the industry's power at the negotiating
table, particularly when it comes to buying raw materials like coal and iron
ore -- key ingredients in steelmaking.
Raw material suppliers and automakers are highly
consolidated by comparison -- and they are flexing their muscles with
steelmakers. About 70 per cent of seaborne trade in iron ore is controlled by
Brazil's CVRD and Australia's Rio Tinto and BHP Billiton.
Last year, these groups collectively increased the cost of
iron ore by 86 per cent. Automakers also tend to have more strength negotiating
contracts with steelmakers because of their size.
By building bigger steel companies, industry giants like
Arcelor SA and Mittal Steel Co. hope to grow bigger elbows at the bargaining
table, said Peter Warrian, a steel analyst at the University of Toronto's Munk
Centre for International Studies.
"If you don't get bigger, you become the meat in the
sandwich. You sit in the middle of a squeeze play."
Steelmakers also worry about the rapid growth of Chinese
steel companies, which produced nearly 300 million tonnes last year -- more
than double Canada and the U.S.'s combined annual production of 130 million
tonnes.
China is using most of its product for domestic
infrastructure projects. But many worry what will happen to prices if
production outpaces domestic demand, leading the Chinese to dump steel on the
international markets.
"It would create a world imbalance in the steel
market," said Warrian. "The Chinese have said they aren't going to do
that, but the fear and concern are still justified."
The thinking goes that the bigger the company, the better
able it might be to absorb such a blow. The battle for size hit close to home
in the Dofasco bidding war, leading analysts to speculate Stelco -- despite
lacking Dofasco's non-unionized work force and profitability -- could be swept
up next.
On the verge of emerging from bankruptcy protection, the
steelmaker is set to undergo a major reorganization by new owners Tricap
Management, Appaloosa Management and Sunrise Partners.
"The Dofasco bidding war put the entire Canadian market
into play," said Warrian.
npowell@thespec.com
905-526-4620