Steel Mills

Consolidation Will Strengthen Steel Mills

Written by John Packard

Steel Market Update received the following from a member of the financial community regarding consolidation and its impact on the steel industry both short and long term. I am reproducing the email in its entirety and you are welcome to add your comments:

“Hope you are well.  Wanted to touch base on your recent steel consolidation commentary.  While I understand the need to express some caution regarding the benefits, I am also perplexed by some of your comments.  First of all, I think it is necessary to remember the STLD / AKS transactions closed 3 weeks ago.  NUE has not yet taken control of the Gallatin mill.  MT just took control of TK Alabama 6 months ago.  The idea new management teams would have been in a position to show up and immediately change the mill approach to marketing is crazy to me.  Just from a practical standpoint, mills typically have different software programs that would slow the process of integrating into a new ownership model.  However, I don’t believe that this suggests STLD / AKS will continue to allow those marketing teams to run autonomously potentially at the expense of realized steel prices across the mill’s total tons.

“There is a long history of consolidation in North America delivering significant benefits.  The containerboard industry and airlines being the most obvious examples.  However, in both cases those benefits were not realized day one.  In the case of containerboard it took a whole year after IP bought Temple Inland for the industry to increases prices.  Within the subsequent year, the industry realized two prices increases moving containerboard prices up over $100 per ton – while the equities more than doubled.  In the case of airlines again it took more than a year for the benefits to translate to earnings – those equities are up 3-4x since then. Again I think it is far too premature to speculate that consolidation in the North American industry steel industry will not be beneficial.  In fact I find it very difficult to argue that consolidation could in any way be a negative.

“To that point I fundamentally do not understand the argument that AKS / STLD now have more tons to place and will therefore be more aggressive.  The two companies did not add tons to the North American market.  Rather they consolidated tons into the hands of fewer players.  A steel buyer is no better positioned today from a supply perspective.  Rather they have now lost the flexibility to competitively bid steel offers across a broader range of suppliers.  STLD and AKS are actually now incented to act in more rational manner as STLD will not want to bid MS tons against Butler nor will AKS want to compete for sales from Dearborn vs. Ashland.  This seems like pretty obvious economic theory to me….”

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SMU Note: AKS = AK Steel, NUE = Nucor, TK = ThyssenKrupp now AM/NS Calvert, STLD = Steel Dynamics, IP = International Paper

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