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Steel Majors Shuffe The Pieces, Port Talbot Deal Has New Obstacles

Published 07/07/2016, 04:02 AM
Updated 07/09/2023, 06:31 AM

If the European steel industry wasn’t beset with problems of poor profitability and overcapacity before Brexit, it now has a sharply increased element of uncertainty to add into the mix.

Steel mills across Europe have been criticized for not addressing overcapacity since the financial crisis, but if you think closing steel mills in the U.S. is a problem, with states lobbying mills to maintain operations, it is nothing compared to the 28 nation states of the European Union, for whom the continued existence of a national steel industry — each country generally has only one or two champions — is a matter of political survival for many governments.

So, for transnational steel producers to moot the possible rationalization of a mill in one country is to invite howls of protest and a political storm. Plus, governments sometimes offer financial support, although technically that is against E.U. rules, but ways are often found.

Steel Deals Now in Peril

Tata Steel’s proposed closure or sale of its U.K. operations has stuttered along this year, with long products being successfully sold to various parties, and the major blast furnaces and flat-rolled operations at Port Talbot, South Wales, being circled by a couple of bidders.

Last month it emerged that Tata was even considering retaining the company themselves after prospects were improved with offers of U.K. government help. Now that is up in the air with the country’s decision to exit the E.U. at some stage in the future.

Tata’s U.K. operations are not the only Brexit-inspired casualty. For some weeks, news has been leaked out of Tata’s ongoing discussions with the German steel giant Thyssenkrupp AG (DE:TKAG) to merge their European operations. Inevitably that would involve some rationalization, but may improve viability with economies of scale and less duplication of production facilities.

As if some confirmation of the rationale were needed, Thyssen’s share price surged 8.3% on the news, but now that deal is in doubt. Not due to any lack of conviction on the part of the two parties concerned, but because of Britain’s vote to leave the E.U. and the uncertainty the decision has created across the single market.

Even ArcelorMittal’s Deal is Imperiled

So far, ArcelorMittal (NYSE:MT)’s proposal to buy Europe’s largest steel plant, Ilva in Italy, looks like it stands a good chance of going through, but the company’s proposal to increase capacity from 4.8 million metric tons to 6 mmt by 2020 will do nothing to reduce excess steel production in Europe. Maybe recognizing the challenge in finding a home for Ilva’s massive capacity, ArcelorMittal has teamed up with Italian group Marcegaglia in an 85/15 partnership.

Marcegaglia is a major steel reroller with an extensive sales and marketing network, but it lacks the major raw steel production clout of ArcelorMittal. Ilva requires more than better sales, though. The plant epitomized much that was bad about some sectors of Europe’s steel industry. The government took over administration of the loss-making business last year to try to save some 16,000 jobs and clean up its polluting factories in the southern Italian city of Taranto.

Environmental pollution had been a major problem at Ilva for years, not helped by a lack of investment by the owning Riva family for decades. Should ArcelorMittal be successful, it has promised to pump €1.5 billion ($1.67 billion) into the plant in new investment to improve efficiency, move the product mix toward more value-added products and, importantly, improve the environmental footprint.

Some industry watchers are hoping ThyssenKrupp, Tata and ArcelorMittal are leading the way in finally bringing about some rationalization, consolidation and balance back into the market. For a while, the falling euro will help counter low-cost imports into the region, but with so much uncertainty resulting from the Brexit decision there is doubt over whether these proposed mergers or takeovers will happen, let alone encourage more in the market.

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