Ten years of ArcelorMittal

Just under ten years ago, during June 2006, Mittal Steel finally gained control of Arcelor, creating what in turn is still today the world’s largest steelmaker, ArcelorMittal.

The battle to create the company was a tough one. It took almost six months to complete, with Arcelor initially incredibly hostile toward the offer. Indeed, Arcelor tried to mount a takeover of Russian producer Severstal in order to counter the approach from Mittal Steel. The CEO of Arcelor at the time, Guy Dollé, also poured scorn on Mittal Steel’s products – “they make eau de Cologne, we make perfume”.

After much negotiation, however, and improved offers, Lakshmi Mittal was able to enjoy the smell of success. ArcelorMittal was created.

But just how successful has the merger been during its first decade?

At the time it was widely seen as another large step in the steel industry’s continued shift away from a localized, sometimes state-controlled industry, to one of multinational champions driven by commercial incentives.

This continued consolidation, and the creation of the world’s largest steelmaker by far – at the time of its creation, ArcelorMittal was more than three times as big as its nearest competitor – was expected to bring greater pricing discipline and improved capacity management.

No longer would the steel industry be characterized by boom and bust. Cyclicality would be managed, earnings stabilized. ArcelorMittal in particular, vertically-integrated into raw materials, would be much more profitable than its peers.

Certainly in the years immediately after the merger, the company performed well. But then, so did nearly all steel companies as they benefited from strong demand growth in China and the consequent rise in steel prices.

Once the global financial crisis hit in 2008/09, however, ArcelorMittal suffered along with everyone else. The slowdown in demand growth from China in recent years and that old foe, widespread industry overcapacity, have seen the company now rack up four consecutive years of losses.

arcelormittal1

The scale of ArcelorMittal and its position as world’s largest steelmaker do not appear to have brought it much degree of protection either. Comparing the net margins of various steelmakers over the past 10 years shows that ArcelorMittal has been outperformed by peers in each major region of the world.

arcelormittal2

So what prevented ArcelorMittal from performing better?

One obvious reason is that the steel industry in fact remains relatively unconsolidated on a global basis.

Indeed, at the time of the company’s creation in 2006, Lakshmi Mittal highlighted that “it is important that the Chinese steel market, which remains highly fragmented, also starts to consolidate…I would hope we will see a move in this direction over the next few years.” (ArcelorMittal factbook 2006, pg.10)

Those hopes have by and large been unmet over the past ten years, with the Chinese steel industry still largely run with political concerns in mind. Despite an uptick in global industry consolidation through the 1990s and early parts of this century, it appeared to reach a peak with the ArcelorMittal merger.

arcelormittal3

Since 2006, the share of the global steel industry controlled by the world’s top five producers has actually shrunk. Even the share controlled by the world’s top ten producers is more or less the same as it was back in 2006.

Regardless of production discipline and capacity rationalization in Europe, Japan, and the USA, the continued expansions in China by a number of companies have severely harmed steelmakers’ pricing power around the world.

This is especially so when we consider that industry consolidation is much higher in industries that supply to and buy from the steel industry.

For instance, the world’s top four iron ore producers account for around 70% of global supply. Meanwhile, the world’s top five vehicle manufacturers account for almost 50% of global vehicle output. In these circumstances it is no surprise that steelmakers’ margins get squeezed.

But ArcelorMittal has also suffered for other reasons.

The result of a mega-merger, it was perhaps inevitable that it would overextend itself in other areas. Too often the focus has been on expensive deals in the quest for size and quantity in place of quality. A number of write-downs in recent years are evidence of this, and a key cause of the large losses that the company has suffered.

The strategy of quantity over quality also helps to explain ArcelorMittal’s relative underperformance over the past decade when compared to other steelmakers such as Nucor and voestalpine.

Of course, ArcelorMittal recognizes this. It is concentrating on reducing costs and trying to refocus on higher-value-added products as part of its Action 2020 plan.

But it also hopes that a number of recent trade actions against Chinese products in various parts of the world will finally spur greater industry rationalization there.

Certainly a greater degree of consolidation and industry rationalization in China would help steelmakers around the world. But, while there is much talk of this, just as there was ten years ago, we believe that any serious moves will take a long time and a lot of political will.

And there is no guarantee that ArcelorMittal’s cost-cutting exercise will boost the steelmaker either.

Guy Dollé was incorrect when trying to compare various steel products with eau de Cologne and perfume. On the whole, steel consumers do not care where their steel comes from, or who produces it. For most steel products, what counts most is price.

It is this general commoditization of the industry that in turn may limit the effect of ArcelorMittal’s cost-cutting efforts. With other steelmakers looking to cut costs as well in this environment of low or even negative margins, global overcapacity, and low pricing power, reduced costs are very likely to be passed onto consumers.

Further industry rationalization may occur in developed markets as a result – indeed, ArcelorMittal itself has recently announced cutbacks at its facilities in Spain and Trinidad & Tobago.

Further deals may even take place in these markets as well, with NSSMC’s intention to carry out a full takeover of Nisshin Steel perhaps the latest high-profile example.

But all of this is just tinkering around the edges when compared to the positive changes that would be brought to the global steel industry were consolidation and rationalization to finally take place in a significant manner in China. ArcelorMittal and steelmakers worldwide will be hoping for that above all else over the coming years.

Sources: ArcelorMittal, JFE, Nucor, Posco, ThyssenKrupp, US Steel, voestalpine, WSA

This article was also published for Steel First in May 2016

 

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