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Monday, June 7, 1999 Published at 13:34 GMT 14:34 UK


Business: The Company File

Steel industry plays hardball

The price of hot-rolled steel has dropped by 29% in 18 months

The world's steel industry is in deep trouble. Demand is down, prices are plummeting, and a strong pound and dollar are hurting producers in the UK and the United States.

In order to survive, steel makers are joining forces. The merger of British Steel and Koninklijke Hoogovens is just one example of how companies are trying to get fit in order to face the competition.

Price slump

Analysts are blaming the economic crisis in Asia for the industry's latest problems.

The economic downturn there slashed demand for steel products, and many companies did "too little, too late" to adjust their production, says Robert Schenosky, a senior steel analyst with Merrill Lynch.

Production cuts came as late as autumn 1998, and much of the steel sold today is coming from stockpiles.

Nonetheless, production figures are down, with last year's world steel output at 782.1 million tonnes - down from 791.6m a year before.


[ image: The price of steel produced in the EU is so low, that Russian and Ukrainin makers find it difficult to compete]
The price of steel produced in the EU is so low, that Russian and Ukrainin makers find it difficult to compete
The lack in demand has hurt prices. At the start of 1998, one ton of hot-rolled coil steel sold for $324 in Europe. Today manufacturers are hard pressed to get $230 - a price drop of 29%.

In fact, prices are so low that even producers from low-cost countries like Ukraine and Russia find it hardly profitable to export steel to the European Union.

Over-capacity

But in reality, steel manufacturers can't blame Asia for their worries. The industry has been in trouble for quite a while.

Firstly, there are too many mills producing too much steel, and the big integrated steel makers face fierce competition from "mini-mills", using scrap metal in their efficient electric-arc furnaces.

Companies like Ispat, which specialises in turning around steel mills, and mini-mill group Nucor have turned up the heat on their competitors.

Under these conditions, only the most nimble manufacturers can be run profitably.

Secondly, customers are driving harder bargains. Big companies like DaimlerChrysler and General Motors are locking in rock-bottom prices through multi-year steel contracts.

To counter this bargaining power, being big can be very beautiful.

Wave of mergers

The watchword is consolidation. On the European continent, steel makers have already gone through a wave of mergers.

France's Usinor joined forces with Sacilor as long ago as 1987, and recently gobbled up Cockerill Sambre of Belgium.

Germany's Krupp and Thyssen linked up two years ago, and Luxembourg's Arbed recently bought 35% of Spain's Aceralia.

British Steel and Hoogovens were the odd ones out, and the situation of the UK company was particularly precarious.

The strong pound has damaged British Steel's profit margins. Every time the euro dropped a cent against sterling, the company's profits took a multi-million pound hit.

Linking up with the Dutch partner to form BSKH takes some of the exchange risk out of the combined group's operations.

Cost-cutting is another incentive. Although there is not too much overlap - both companies have separate retail networks in the UK and the Netherlands - the new BSKH group hopes to save some £194m a year.

At the same time, British Steel will get the much-needed access to the continental market.

Timing is everything

But analysts say that there is more than pure economics driving this merger.

British Steel has a rather poor record for taking over other companies. Its managers were reluctant to take risks, their decisions could hardly be described as bold.

But this year the company got a new chief executive, John Bryant. The merger is very much his deal, an attempt to prove that he is the right man to invigorate the company.

The deal has come at just the right time for British Steel.

  • In the last two months steel prices have been rising again.
  • Analysts say that Asia's economies are on the verge of recovery.
  • And the merger will be completed in autumn, just when the seasonal summer slump is over and demand is picking up.
Trade wars

There is only thing that could now stop the new Anglo-Dutch group: a steel trade war.

US steel producers have been badgering their government for many months that they are being undercut by cheap imports. The US government is already investigating Japanese steel imports.

Never mind that the US industry has been highly profitable for the past seven years;
that its companies have resisted for years to merge into more efficient units;
or that most analysts explain the alleged price 'dumping' by Brazilian, Russian and Asian producers by the strong dollar, not loss-leading sales tactics.

European producers could get caught in the fracas.

It will not help that transatlantic trade relations are under strain already, because of disputes over beef, bananas and genetically-modified food.

British Steel may have made the right move at the right time.

But as the steel industry plays hardball, BSKH may find life just a touch harder than expected.





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