The companies signed a memorandum of understanding (MoU) on Wednesday September 20 to join forces and form Europe’s second-largest steel producer, which will be named ThyssenKrupp Tata Steel.
“At the end of the day, Europe will be controlled by two mills – ArcelorMittal and ThyssenKrupp Tata Steel. They will try to push prices up – they are not stupid,” one Southern European trader said on September 20.
“It is always positive when there are fewer companies in the market,” one European tube trader said. “When there are fewer [market participants], prices will be more stable.”
As well as having the potential to raise spot market prices, the new joint venture could have increased leverage through contracts.
“The group would have a better position when negotiating longer-term contract agreements with big customers, such as the automotive industry, which consumes 24% of strip-mill products in Europe,” Marina Maliushkina, senior analyst at Metal Bulletin Research, said on Thursday.
ThyssenKrupp Tata Steel will boast combined annual revenues of around €15 billion ($18 billion) and will ship around 21 million tpy of steel.
Effects of consolidation
The MoU between the companies represents the second significant move toward consolidation in the European steel markets this year, after Italian authorities accepted ArcelorMittal’s bid to take over Italian steelmaker Ilva on June 6, although this is still awaiting approval from EU anti-trust authorities.
Nevertheless, since the deal was agreed, Ilva has demonstrated a change in pricing strategy and has been helping to raise hot rolled coil (HRC) prices in Italy. It would previously price its flat steel products at the bottom of the market, sources have told Metal Bulletin.
The premium for Metal Bulletin’s price assessment for Northern European domestic HRC over Southern European HRC was €30 per tonne on June 7. On September 20, the prices in both regions were equal at €520-540 per tonne ex-works.
“The Italians had the lowest prices [but] there’s the influence of ArcelorMittal and no imports, so the Italians have had to raise their prices,” the tube trader said.
ArcelorMittal will have a 38% market share in Europe’s flat steel sector when it finalises the Ilva purchase, while ThyssenKrupp Tata Steel will have a combined market share of 25%, according to investment bank Jefferies.
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Along with the increased pricing power, one analyst said that prices could be driven upward by alterations to steel output at the three production plants belonging to the joint venture.
“There will be a significant reduction [in the number] of employees so there will be capacity closures, which will increase capacity utilisation,” Philip Ngotho, an analyst at Dutch bank ABN Amro, told Metal Bulletin.
A drop in capacity would result in higher utilisation rates at the company’s production facilities. This would mean that there would be less slack to cover additional demand, which would also raise steel prices, Ngotho added.
The group intends to eliminate 4,000 jobs, with the losses to be shared evenly across the two companies, in order to raise profitability. Half of the job cuts will come in administrative functions, while the other half will be among production personnel, Metal Bulletin understands.
While ThyssenKrupp and Tata Steel have said that they will review production and could make cost cuts in 2020, neither company has commented directly on whether steel output could be reduced before 2020.
Tata’s 4.90 million-tpy integrated steel plant in Port Talbot, South Wales, could bear the brunt of any savings made by the group in the coming years, some analysts said.
“ThyssenKrupp flagged up the potential for additional savings beyond 2020 from upstream crude steelmaking and hot rolling capacity adjustments, which we believe are most likely at Port Talbot,” investment bank Jefferies said on Wednesday.
“The impression in the market is that the Tata plant in The Netherlands is one of the most cost-effective plants in Europe,” Ngotho said. “They will be looking to raise profitability, so cuts could fall at worse-performing plants.”
But a drop in the exchange value of sterling after the UK voted to leave the EU has strengthened the Port Talbot plant’s position in export markets.
“Because of the recent weakening of the pound, Port Talbot may no longer be considered the financial burden it once was,” Alistair Ramsay, research manager at Metal Bulletin Research, said.
And further consolidation in the European steel sector is possible in order for companies to remain competitive, according to Philip Barker, head of industrials at Cavendish Corporate Finance.
“With overall market conditions improving, Chinese exports falling and profitability rising,” Barker said, “it is likely that we will see continued mergers in this industry to help to lower costs and to reduce the number of competitors in this market.”
Merging the European flat steel divisions of ThyssenKrupp and Tata Steel will raise prices in the EU markets but will also promote price stability, analysts and market sources told Metal Bulletin this week.