|
: The emergence of Arcelor Mittal Steel is a landmark in global consolidation of the industry. National and regional markets have given way to trans-continental ones. The new entity will have a leading position in five of the nine major global markets. Large synergies in purchasing, manufacturing and marketing is a major plus in an industry with sharp cyclical trends in earnings and profitability. Projections show Arcelor Mittal’s output will go up from 100 mt in 2005 to 150-200 mt in 2015. The 82% premium paid, hence, indicates substantial unlocking of shareholder value. The timing is also appropriate. Two decades of European consolidation helped build Arcelor, from a fragmented and regional steel market. But the challenges of globalisation called for new synergies, to protect the gains. Soaring input prices and large additions to capacity, particularly in Asia, pose new threats. Last year, coking coal prices more than doubled; those of iron ore rose by more than two-thirds. Oligopolistic markets—with the three largest ore and the six largest coking coal suppliers accounting for around two-thirds of the global market—may further complicate imperfections and squeeze profit margins in a downturn.
The threat from new capacities in Asia is mainly because China, the world’s largest producer, has doubled output in five years, while India, the seventh largest, pushed up production by almost half. Growth in capacity outstrips consumption in both and many experts believe new capacities planned may even derail the industry. A waning boom is already evident from the softening of peak-level prices. Excess capacities being built in Asia may now head it into a ‘death spiral,’ with producers racing to cut prices and maintain output. Pessimists say global capacity utilisation may fall from the current 96% to 80%, post-2009. Merger economies will hold in good stead during such periods. Arcelor Mittal would also gain from the latter’s forays in fast-growing Asian markets.
As with all other big mergers and acquisitions, the downside risks are equally large, given the disparity in ownership patterns and business practices. Care has been taken to avoid any major mishaps by setting up special governance mechanisms to facilitate more effective integration. A majority of independent directors and more transparency in appointments and remuneration will contribute to better corporate practices. The merger clearly marks an inflexion point that will tread new paths, unless some unexpected developments disrupt the initiative.
More from Edits & Columns
Discuss this story on expressindia forums
|
|
 |
 |
 |
About Us | Contact Us | Advertisers | Site Map | Make us your homepage | Work for Us | RSS | Subscribe | Electronic Edition | Privacy Policy© 2009: The Indian Express Limited. All rights reserved throughout the world
