DATE: Embargoed until 25 August 2005
CONSOLIDATION OF METALS SECTOR MUST CONTINUE
The new global M&A report, ‘Forging Ahead - Mergers and acquisitions activity in the global metals industry’, from PricewaterhouseCoopers, finds that although a record amount of money has changed hands in M&A transactions in the industry, consolidation needs to continue to ensure a healthy outlook.
In 2004 the steel sector led the way with 117 transactions collectively worth $31.4 billion and this trend continues. The need to reduce overcapacity and secure greater market clout will almost certainly fuel further deals in the steel sector, as well as the increasing importance of emerging markets such as Brazil, Russia, Central and Eastern Europe, India and China. Companies in these countries could be both attractive targets and potential buyers.
Some of the larger steel producers may also decide to buy their own iron ore or coal mines in order to hedge against price volatility in their raw materials. Many of the vertically integrated steel producers already own mines, but more mini-mills will follow the same route, while smaller and mid tier players could be forced to focus on steel finishing or niche markets.
One final factor which will play a part in stimulating M&As in the steel sector is the current combination of low valuations and high earnings. Steel sector stocks have recently outperformed those in mining, engineering and machinery and chemicals, but are still valued at less than their industrial peers. Greater market concentration will reduce this valuation gap.
Mark Okes-Voysey, Global Metals Industry Leader, PricewaterhouseCoopers said:
“The steel sector must continue to consolidate to remain competitive. Greater market concentration will give individual steelmakers many more opportunities, such as increased
bargaining power with suppliers and customers, and increased operating flexibility. It will ultimately ensure they are better able to survive, should iron ore prices keep soaring.”
The global aluminium sector is at a different stage of its evolution. It has already consolidated to a much greater extent than the steel sector. This has stablised production and enabled individual manufacturers to be much more responsive to fluctuations in demand.
But the Western Europe and North America aluminium markets are relatively sluggish; it is the emerging economies of Asia Pacific and Eastern Europe that now show most potential. Some Western companies could therefore expand their presence in these regions by acquiring local producers, while those that are already serving such markets could invest in foreign mining operations to secure the raw materials they require.
The shifting pattern of global demand is one probabable driver of future M&A activity in the aluminium sector. Higher energy prices and the need to maximise profits could also encourage some manufacturers to restructure their portfolios and dispose of assets they no longer want. It seems likely deal making in the aluminium sector will take place on a smaller scale than in other sectors of the global metals industry for the next few years.
James Forbes, Global Metals Advisory leader, PricewaterhouseCoopers added:
“The top five aluminium producers have nearly 40% of the total market – double the share enjoyed by the top five steelmakers. These two key sectors of the metals industry are at quite different stages in their market development cycles, but both are likely to experience further buoyant levels of M&A activity over the next few years.”
Domestic deal dominance – but many companies are now looking further afield
Domestic deals form the bulk of M&A activity with 99 transactions collectively worth $25.7 billion in 2004. Cross-border transactions worth $11.3 billion in deals value saw a modest increase, but look set to grow rapidly. Many companies are ready to spend more money much further afield. Most of the largest steelmakers, faced with rising energy costs (particularly in Europe as a consequence of the EU Emissions Trading Scheme), rising raw material and transportation costs are now turning towards the emerging markets of Central & Eastern Europe, Asia Pacific and Latin America, that jointly accounted for 43% of the total number of deals that were struck, and 31% of the total value that was traded, in 2004.
By region
By region, Western Europe has been the hotbed of M&A, particularly in cross-border activity. Regional acquisitions were dominant in Asia-Pacific with most focusing on securing access to the markets of China and South West Asia. By contrast, the value of cross-boarder deals by North American companies grew while domestic deals fell slightly.
ENDS
Notes to Editor
1. To download a copy of Forging Ahead: Mergers and acquisitions activity in the global metals industry , or to find out more about PricewaterhouseCoopers Global Metals practice, visit www.pwc.com.metals or www.pwc.com/forgingahead
2. PricewaterhouseCoopers global metals practice comprises a network of industry professionals strategically located in over 30 countries around the word. The practice serves metals clients involved in ferrous and non-ferrous primary and secondary production by bringing global experience, industry best practices and a wealth of specialised resources together to help solve their business issues.
3. PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for public and private clients. More than 120,000 people in 144 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders.
"PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
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