With its forbidding chimneys belching smoke into the Mediterranean air, the vast Taranto steelworks on the coastline of southern Italy makes an unprepossessing poster image for the long-awaited consolidation of Europe’s steel sector.
As the largest mill in Europe capable of making the metal, it should have benefited from the economies of scale that give an advantage in heavy manufacturing.Instead, the plant has been hit by a succession of setbacks, including a legal case over accusations that it poisoned local people with toxic emissions, nationalisation and eventually insolvency in 2015.
Deliverance finally came this summer when the company to which it belonged, Ilva, was sold for €1.8bn to a consortium led by ArcelorMittal, the world’s largest steelmaker.
The deal was seen by industry executives as an important step in the consolidation of Europe’s steel sector many believe is essential to help it drag itself fully out of the doldrums.
Profitability among the continent’s steelmakers plunged from a peak in the third quarter of 2008, when each tonne shipped delivered on average €215 in earnings before interest, tax, depreciation and amortisation, to just €46 per tonne in the first quarter of 2016, according to calculations by UBS. The figure has recovered since to about €83 a tonne in the first quarter of 2017.
“Ilva is a low-cost producer [and] we think with all our expertise, technological inputs and management expertise, we can make it a very successful steel-producing facility,” says Lakshmi Mittal, chief executive of the Luxembourg-based group.
Another significant corporate combination is also being planned. Europe’s next two largest producers by output, Tata Steel of India and Germany’s ThyssenKrupp, have been in talks for more than a year. The hold-up, a reform of Tata’s UK pension fund, has just been concluded, paving the way for a joint venture agreement.
But unlike the last big shake-up in ownership of European steel, when empires were built during the commodities boom a decade ago, these moves reflect a period of weakness rather than strength.
Since the financial crisis erupted in 2008, steel producers in the EU have struggled with weakened demand in the region, expensive “green” policies and cheap imports from outside the bloc.
Tata has endured persistent losses at its UK arm, while ThyssenKrupp wants to leave steelmaking to concentrate on more lucrative capital goods, such as elevators and components for industry. Mergers offer a way to lower costs and reduce the number of competitors in an oversupplied market, while giving greater clout to negotiate with big customers in key areas such as automotive.
“For these guys, consolidation of the markets . . . increases their pricing power,” says Andrew Zoryk, managing director of natural resources at the consultancy Accenture.
Supplies from Ilva will take ArcelorMittal’s share of total European sales of flat steel – which goes into automobiles, white goods, packaging and tubes among other things – from 26.5 percent to above 30 percent, according to research by Berenberg. A Tata-Thyssen venture would control over a fifth of that market. Alessandro Abate, an analyst at Berenberg, believes that improvements at Ilva under its new owner could have a positive impact on the wider European steel market. ArcelorMittal has pledged to invest in upgrades and an environmental clean-up.
“If Ilva goes back to the level of reliability it used to have . . . the market end-user in [Italy] will be more prepared to price in a premium,” he says.
Buyers of steel would have less need to lock up cash for weeks or months in cargo vessels transporting the material from overseas.
“If this happens, it’s inevitable that rising Italian steel prices due to better performance [by Ilva] will also support northern European steel prices,” says Mr Abate.
As Italy is the first port of call for much of the steel entering Europe, a revitalised Ilva could also discourage some inbound shipments – in particular from China. A flood of cheap material from China’s heavily subsidised steel sector was blamed for crashing global steel prices to the lowest level in a decade in late-2015. Jean-Claude Juncker, president of the European Commission, recently said that China’s overhang of steel production was twice Europe’s total output.
But market conditions have improved, with Chinese exports falling and profitability rising. UBS expects about
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