Zacks Industry Outlook Highlights: Nippon Steel & Sumitomo Metal, ArcelorMittal and POSCO

Zacks

For Immediate Release

Chicago, IL – July 5, 2013 – Today, Zacks Equity Research discusses the U.S. Steel, including Nippon Steel & Sumitomo Metal Corporation (NSSMY-Free Report), ArcelorMittal (MT-Free Report) and POSCO (PKX-Free Report).

Industry: Steel

Link http://www.zacks.com/commentary/27994/

The primary inputs for the steel industry are iron ore and coking coal, as well as coke, scrap, alloys and base metal. The industry also uses large volumes of natural gas, electricity and oxygen for its steel manufacturing operations.

In the first half of 2012, iron ore prices were more or less stable before plummeting to a three-year low below $100 per ton in September. It recovered by the end of 2012 due to aggressive restocking drive by Chinese steel mills.

However, it remained well below the Feb 2011 record high near $200 per ton. Prices peaked to $150 per ton range in Jan and Feb this year, but dropped to a low of $113 per ton in May in tandem with changing sentiment over China’s economic growth and steel output.

Chinese demand for iron ore is growing at a slower rate, while supply of iron ore is growing significantly. Iron ore prices are expected to slump in 2013 due to the economic uncertainty in China.

Consolidation & Divestitures

Mergers and acquisitions (M&A) have remained an important growth strategy in the steel industry, leading to additional steel capacity, production efficiency and economies of scale. However, consolidation was minimal in 2012, given the current economic uncertainties in the developed economies as well as a slowdown in the emerging regions.

In 2012, a landmark deal was the merger of Japan's largest and world's sixth-largest steel maker Nippon Steel Corporation with 27th-ranked Sumitomo Metal Industries to form the world's second largest steel firm -- Nippon Steel & Sumitomo Metal Corporation (NSSMY-Free Report). With a combined capacity of 46.1 million tons, the merger is targeted to generate savings in the face of increasingly intense global competition.

Despite the considerable scope for consolidation in the steel sector, companies are holding back and instead focusing on conserving cash. They are waiting for a stronger and more sustainable economic upturn to spur a wave of consolidation. They are instead focusing on shedding unproductive operations, cutting costs and restructuring.

ArcelorMittal (MT-Free Report), the world’s largest steel producer, kicked off 2013 with the sale of its 15% stake in iron ore mines in Canada for $1.1 billion to a consortium that included South Korean steelmaker POSCO (PKX-Free Report) and Taiwan-listed steelmaker China Steel. The divestiture is in line with the company’s effort to get rid of production overcapacity in Europe as well as to reduce its debt.

ArcelorMittal had earlier planned to permanently close its plant in Liege, Belgium, due to slack demand. However, this faced protests from the country's leaders. Currently, the government of Belgium's Wallonia region is considering whether to nationalize ArcelorMittal’s steelworks.

ThyssenKrupp, one of the top 20 steel producing companies in the world and the biggest steelmaker in Germany, completed the sale of its stainless steel operations Inoxum to Finland’s Outokumpu for $3.7 billion in Dec 2012. The company is seeking to reposition itself to become a more diversified industrial company after incurring two consecutive years of record losses.

The company is also on track to sell its Steel Americas assets -- a plant in Brazil and one in the U.S. ThyssenKrupp has faced a succession of costly write-downs since its decision to build the plants. Following these transactions, sales from steel will account for only 30% of ThyssenKrupp’s sales (down from 40%) with the balance 70% from capital goods and materials and logistics services.

We expect M&A activity to remain slow in 2013 until prices stabilize and the industry strikes a balance between supply and demand. Going forward, the abatement of the Euro-zone crisis, recovery in the U.S. and Chinese economy will determine the fate of such deals.

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