The recent wave of mergers and acquisitions within the global steel industry does not necessarily mean the industry is moving into a new era of prosperity. Instead, an enormous challenge is surfacing. The escalating conflict between the mining and steelmaking sectors is providing a big push towards sweeping integration.

Abroad: a Steel Behemoth Surfaces

When Mittal Steel raised its bid price to 27 billion euros (US$33.9 billion) on June 24, Arcelor’s board, which had been long opposed to the takeover bid, changed its attitude and agreed to sign on the merger deal.

The marriage between Mittal and Arcelor, the world two largest steel groups, has seen twists and turns. Before Arcelor capitulated to Mittal’s bid, both sides had engaged in acrimonious battles. After rebuffing two bids by Mittal Steel, Arcelor announced its merger with Russian group Severstal on May 26. But things turned around on June 2 when the European Commission gave antitrust clearance to Mittal’s bid for Arcelor. Mittal’s bid price rose to 40.4 euros (US$50.7) per share following the decision, 49% higher than Mittal first bid in January, and approximately 10% higher than the second.

Arcelor-Mittal, the steel giant created by the merger, will see Mittal Steel founder Lakshmi Mittal as its non-executive president, and former Arcelor chairman Joseph Kinsch as its chairman until he retires next year. Among the management board of the new company, four will be named by Arcelor, and three by Mittal.

Fate was not so kind to Arcelor CEO Guy Dolle. As predicted by the European media, Dolle has been given his walking papers - not much of a surprise given the strong and even derogatory language he used against the takeover bid for the past five months. He once described Mittal’s steel as cheap eau de cologne compared to Arcelor’s fine genuine perfume and referred to Mittal Steel’s bid as “monkey money”.

Based in Luxemburg, Arcelor-Mittal is expected to dramatically alter the landscape of the global steel industry. With an expected steel production accounting for 10% of the world’s total, crude steel output of more than 120 million tons and annual sales of 55 billion euros (US$69 billion), the new company will be four times of the scale of Nippon Steel Co., Ltd., the world’s second largest steelmaker after the merger.

But the marriage could be an unhappy one. Both companies differ considerably in their business approaches: Arcelor focuses on offering high-end steel products to European auto makers, while Mittal mainly produces mediocre-quality and low-priced steel products. Indeed, analysts say the deal may lead to a big staff downsizing and a shift in business strategy, putting thousands of Arcelor employees in Europe in jeopardy of layoffs. Regardless, as is often the case in moneyed unions, the steel giants’ complementary products might also open up great possibilities for future development.

At Home: Different Stakeholders Dominate Integration

At the recently concluded iron ore price talks, 16 domestic steelmakers led by the Shanghai-based Baosteel Group reached a price agreement with the world’s three giant iron ore suppliers, Anglo-Australian miners BHP Billiton, Rio Tinto Group and Brazil’s CVRD. According to the agreement, the price of iron ore this year will be 19% higher than 2005.

Though creating the world’s largest demand for iron ore resources, China has not yet gained a big say in the price of iron ore it imports from abroad. Leading Chinese steelmakers should quicken the pace of mergers and reorganization to play a bigger role in setting the iron ore price, some insiders argue.

Amidst this wave of domestic mergers and acquisitions, strengthened ties between foreign and state-owned Chinese steelmakers, national and local steel companies as well as different local steelmakers are emerging. Many local deals have been pushed by the government, as represented by the merger between Baosteel and Heibei-based Hansteel as well as Baosteel and Shandong-based Jisteel.

In late 2005, Baosteel built a strategic alliance with Maanshan Iron & Steel Company Limited (Masteel) located in central China and invested billions of yuan to buy circulating shares of 8 listed domestic steel companies. The move was seen as a decisive step by Baosteel to turn itself into a giant in China. In a follow-up move, Baosteel offered an unsolicited bid to Hansteel in May, 2006. But is this market-based approach able to bring Baosteel where it wants? Perhaps not. The domestic steel market is not yet fully integrated.

Investment consulting firm Hollyhigh International’s chief analyst Ji Shupeng believes mergers between large state-owned steelmakers are usually arranged by governmental authorities at a set price. The terms of payment, personnel arrangements and legal procedures are likewise influenced by the government. He notes the bitter dispute between the larger Baosteel and its much smaller, highly sought-after Hansteel has a lot to do with the provincial government’s position on the issue.

While standing still in its takeover talks with Hansteel, Baosteel is also going nowhere in its effort to acquire Shandong’s Jisteel.

According to Shandong State-owned Assets Supervision and Administration Commission, the year-long talks on Baosteel’s acquisition of Jisteel wrapped up recently. Shandong now plans to combine Jisteel and Laisteel, the largest two steelmakers in the province, to create a 30-million-ton manufacturing giant. Jisteel and Laisteel have respective product turnouts of 10.42 and 10.34 million tons annually, ranking sixth and seventh in the country. Their combined turnout is close to two million tons less than Baosteel’s 22.73 million.

Shandong originally planned to sell Jisteel to Baosteel and attract an Arcelor bid for Laisteel, but finally turned to internal integration. The local government showed more interest in integrating Jisteel and Laisteel than merging them with companies from the outside, as it involves fewer difficulties and ensures government tax revenues will not be diluted.

The high level of activity among China’s steelmakers is working to shape a new industry landscape.