TORONTO, April 15, 2008 — Deal making in the global metals sector soared to unprecedented levels during 2007 and is up 67% on the previous year, despite the impact of the credit crunch. 'Forging Ahead', the latest study of mergers and acquisitions (M&A) in the sector by PricewaterhouseCoopers (PwC), also found there have been dynamic shifts of focus: from steel to aluminum and away from Western Europe to the new M&A hotspot of North America, and in particular Canada.
The rate at which the metals industry — largely the aluminum sector — is consolidating increased dramatically during 2007. There were 411 disclosed deals, slightly more than the 385 that took place in 2006. But the aggregate value of those deals was US$144.7bn, a massive increase on the US$86.4bn traded the previous year. The aluminum sector accounted for much of this activity, with 56 transactions collectively worth US$77.3bn, nearly four times the US$21.3bn it generated in total between 2003 and 2006.
"The scope for deal-making in the global metals sector is huge, despite the turbulence in the capital markets," says Jim Forbes, global metals leader, PwC. "In fact, with asset prices looking set to continue to slide as a result and corporate buyers enjoying a stronger hand than ever, M&A activity will be stimulated even further. The fragmented steel sector looks particularly ripe for further consolidation."
The aluminum sector has traditionally experienced much less M&A activity than the steel sector but mining giant Rio Tinto set a new sector record with the US$38.1bn acquisition of Alcan. This, together with RUSAL's US$30bn three way merger with SUAL and Glencore International has helped push the total of aluminum deals to US$77.3bn, more than 19 times the amount traded in 2006.
Meanwhile deal making in the steel sector was largely incremental, with the notable exception of Tata Steel's acquisition of the Anglo-Dutch Corus. ArcelorMittal made various small acquisitions in emerging markets and several North American producers also brought smaller competitors in order to reduce overcapacity or expand their product offerings.
'Forging Ahead' also includes a focus on the key regional markets:
North America
North America has become the world's metals M&A hotspot, with 115 deals worth US$77bn, nearly as much as the value traded in the entire metals industry the previous year. Rio Tinto's acquisition of Alcan accounted for nearly half this sum but a number of steelmakers based in emerging economies also purchased North American producers as a means both of moving up the value chain and of getting access to the US market, where steel consumption is forecast to outstrip production for the next few years.
Deal making was particularly hectic in Canada. Two of the three new owners of the key remaining independent steel companies came from other regions, indicating the Canadian government believes it is better to have strong local operations in foreign control than it is to have locally owned companies that are struggling to compete.
'Forging Ahead' anticipates that steelmakers from the emerging and industrialized markets alike will continue to show considerable interest in North America for some time to come. The longer term outlook is attractive and US consumption is forecast to grow by 3% a year for the next two years.
Central and Eastern Europe
M&A activity soared in this region in 2007 with just 23 deals worth a total US$30.8bn, more than nine times the US$3.3bn that was traded the previous year. A single transaction, the creation of United Company RUSAL, accounted for 97% of this value.
However, the Central and Eastern European steelmaking sector is already consolidated; the top ten manufacturers control 85% of crude production and many of the larger steelmakers are also self-sufficient in iron ore and coal. Many of the region's steelmakers have therefore been looking elsewhere.
Western Europe
There were 104 deals collectively worth US$20bn in Western Europe compared with 69 deals worth US$49.3bn the previous year. The steel sector remained the source of most of this activity. The aluminum sector accounted for another 18 deals collectively worth US$129m, marginally more than the US$76m traded in 2006. However deal making in other metals sectors was significantly higher than during 2006, with 27 deals worth a total US$3.2bn.
Central and South America
Twenty one deals collectively worth US$9.6bn took place in Central and South America in 2007. Apart from Anglo American's acquisition of a minority stake in the Sistema Minas-Rio iron ore mine, the steel sector accounted for nearly 75% of this sum.
Asia Pacific
There were 148 deals with an aggregate value of US$7.2bn in the region, a substantial drop on the 154 deals collectively worth US$15.1bn of 2006. The 52% decline in the value of transactions is largely attributable to the lull in the Chinese steelmaking sector, which remains very fragmented, despite the central government's Steel Industry Development Policy to promote the consolidation of the sector and development of several major domestic steel producers.
'Forging Ahead' also includes an analysis of how the regulation of carbon emissions is likely to affect metals companies.
"The carbon-offsetting markets are growing rapidly and a number of metals companies are beginning to capitalize on the opportunities they present. But regional variations in the regulation of carbon emissions could seriously disadvantage metals companies based in industrialized countries," says Forbes.
In addition, this year's issue includes discussion of the opinions of chief executives in the metals industry taken from the PricewaterhouseCoopers 11th Annual Global CEO Survey. They seem surprisingly untroubled about climate change although are more worried about rising energy costs and supply chain disruptions than executives in other industries.
A copy of 'Forging Ahead 2007' can be downloaded at: www.pwc.com/metals.
Methodology: The report provides an analysis of domestic and cross-border deal activity in the global metals industry (with the exception of mining transactions unrelated to the production of steel and aluminum). It is based on data from Thomson Financial (supplemented by company reports, where necessary), and covers all mergers and acquisitions completed in 2006 and 2007. Any minor discrepancies between the figures published here and those recorded in last year's edition of Forging Ahead are attributable to the difference in the data sources used or to variations between the preliminary and final value of certain deals, where due diligence or other circumstances have provided grounds for changing the price. The analysis encompasses announced deals for which values have been disclosed.
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