The FINANCIAL — Beijing. Rising raw material prices and a greater desire by some steel producers for self-sufficiency will likely drive more upstream moves, according to a new report, Going vertical.
Cost management in a new era of steel integration, released today by the Deloitte Touche Tohmatsu (DTT) Global Manufacturing Industry group.
Presenting today at the 6th International China Steel Congress in Beijing, Nick Sowar, Global Steel Industry Leader for the DTT Global Manufacturing Industry group, says, “Steel manufacturers are revisiting vertical integration as the model as the economic environment improves. And with raw materials prices rising again, more steel producers will look upstream as a means to control costs, maximize margins, and ensure a steady supply of inputs to meet future growth in demand.”
According to the report, upstream and downstream transactions not involving the purchase of another steel works, blast furnace, or rolling mill made up 67 percent of the deals in the global steel industry in 2009 (or 74 of the total 110 transactions). The report indicates that this was up from 58 percent of deals in 2008 (or 105 of 180 vertical deals). In terms of upstream investments, the report finds that Brazil is the number-one “hot spot” attracting nearly US$3 billion worth of transactions from 2005 to 2009. In addition to Brazil, the United States (for scrap), and Australia (for iron ore) also continues to be attractive target locations.
“China has been a dominant upstream player in the last few years with steel producers acquiring access to higher quality raw materials to keep up with market demand,” explains Rosa Yang, Manufacturing Industry Leader, Deloitte China.
From 2007 to 2009, the report reveals that the value of Chinese investment has increased steadily, with upstream acquisitions of iron, coal and scrap reaching more than US$880 million. China is actively seeking opportunities in some of the most attractive upstream markets in the world—Brazil and Australia—with total transaction deals in these countries equaling more than US$600 million in the years 2005 to 2009. According to the report, China has invested around US$2.8 billion in vertical integration deals over the past five years (from 2005 to 2009). Approximately 64 percent of China’s US$816 million in vertical deals in 2009 alone was targeted at iron ore investments—a significant rise from 2.5 percent (or US$109 million) in 2008. On a global basis, China’s investment in iron ore resources represents approximately 24 percent of total global M&A deal values in 2009.
“During the global economic downturn, cost management was a focal point for Chinese steel producers,” says Yang. “In order to stay globally competitive, companies were looking for ways to reduce costs but at the same time improve the quality of their products.”
“Vertical integration may help to enhance supply chain efficiencies and offer the ability to drive out costs,” adds Sowar. “But it is important to look for the cost efficiencies and synergies before and during the transaction not just after the deal.”