FOCUS: European steelmaker consolidation could help control prices, costs

European steelmakers need to consolidate to gain better control over pricing and the supply-demand balance as well as to better tackle rising production costs, but it will not solve the major problems of the European flat steel market, sources told Fastmarkets.

And in November 2020, rumors about two major potential sales of European mills have finally been confirmed:

Tata Steel in Netherlands is in negotiations with SSAB and Liberty Steel made non-binding offers for Thyssenkrupp’s steel unit. Fastmarkets spoke to European flat steel producers and distributors to see what changes these potential mergers could bring to the market.

Market participants were split over whether consolidation will help to fight overcapacity in the European market, with some believing that it will be easier for the producers to control production rates, while others claim producers will resist reducing output to ensure they maintain their market share.

“The European market requires consolidation and we will see more mergers,” a German producer source said. “There is overcapacity in Europe, and consolidation will allow producers to take production rates under control. In addition, this will make much-needed, sustainable, price increases possible.”

But an Italian producer said it was too soon to say what the impact of consolidation might be.

“It depends on who merges with whom among the bigger players. Besides, oversupply will remain and the challenges to reduce it are both economic but maybe even more political,” the producer said.

A Northern European trader said that, even though there is clearly still is a lot of overcapacity, consolidation would not have much of an impact.

“To reduce [capacity] will cost a hell of a lot of money. Beside, if the mills are going to close production sites, they will get trouble with the [local] governments in those specific areas. No one want to lose ‘their’ steel industry and they are depending on Brussels for the import duties. If that stops, the Chinese, Russian or other non-EU mills will again bring a lot of material into Europe,” he said.

Sources unanimously agree, however, that consolidation will give producers better control over steel prices across Europe and that will mean they can better control production costs.

“Generally speaking, in the end, the EU industry as a whole would benefit from a less fragmented supply and, in turn, help price stability,” the Northern European trader said.

“The more consolidation, the more the mills can control the market and prices, the more power they will have on the purchase side, therefore, they will be able to save costs,” he added.

There would be more control over prices, an Italian distributor said, “with a [better] balance between demand and offers [making ]prices more stable.”

But faced with fewer producers, another source said, “consumers will [find that] negotiating prices will be more difficult.”

Some market participants, however, remain sceptical about positive outcome of mergers in the European market.

“In mathematics, minus add minus gives plus. But I do not think same applies to the steel industry,” a German distributor said. “When two companies, both having their own big problems, come together, nothing good can come out of it.

“It would end as a disaster [even though] the idea itself is good. But there will be almost no impact on prices or pricing policy and it will not help either producer. Acquisitions cannot stop prices from falling if the market is negative,” he added.

Another Italian producer added: “The uncontrolled mix between consolidation and rising protectionism in the EU will put the market in a very dangerous position. The upstream product price - HR coils for instance - will be higher, but this will have negative impact on downstream products and finished goods.”

SSAB and Tata Steel
Tata Steel Europe has two integrated steelmaking sites, both equipped with blast furnaces: one at IJmuiden in the Netherlands and the other in the UK, at Port Talbot in South Wales.

Both plants produce slab, hot- and cold-rolled coil and galvanized coil. The IJmuiden site has capacity for 7.5 million tonnes per year, while Port Talbot can produce 4.9 million tonnes per year.

Swedish steelmaker SSAB is the major steelmaker in the Nordic countries. The company has two blast furnaces in Raahe, Finland, with total capacity for 2.5 million tonnes per year of pig iron. In Sweden, it has three blast furnaces, one in Lulea and two in Oxelösund, with combined capacity of around 4.4 million tonnes per year.

SSAB’s Nordic assets produce hot-rolled, cold-rolled, galvanized and pre-painted coil and welded tubes.

Earlier this month Tata Steel confirmed that it was in discussions with SSAB over the sale of its IJmuiden plant in The Netherlands. Tata Steel has also initiated the process of splitting up its main European operations - Tata Steel Netherlands and Tata Steel UK - with the aim of pursuing separate strategic paths for the two businesses.

SSAB also confirmed the “discussions with Tata Steel Group concerning a potential acquisition of Tata Steel Europe’s IJmuiden steel mill and related downstream assets.

“SSAB has participated in several different discussions concerning consolidations in the European steel industry. The discussions with Tata are ongoing, but no decisions have been made. There can be no certainty that any transaction will materialize.

“A further announcement will be made in due course,” the company added.

Market sources said they believed the deal would allow SSAB to increase its presence in mainland Europe.

“Tata announced its intention to leave Europe and concentrate on India about two years ago... So it makes sense that SSAB would buy [the IJmuiden facility],” a second Northern European distributor said.

“SSAB and Voestalpine are two of the healthier steelmakers in Europe, so they will be potential partners for Tata UK and/or Tata Netherlands, where I think Tata in the Netherlands would be the most logical partner for SSAB,” he added.

Liberty Steel and Thyssenkrupp
Liberty announced in October that it had made a non-binding indicative offer to buy Thyssenkrupp’s steelmaking business.

The acquisition, should it be completed, would create Europe’s second-largest steel producer by combining Liberty’s steelmaking capacity of about 10 million tonnes per year with Thyssenkrupp’s 11.5 million-tpy capacity, according to Fastmarkets’ calculations.

Moreover, the acquisition would allow Liberty to ensure a sustainable supply chain to feed it’s processing lines in Dudelange-Liege (in Luxembourg and Belgium), which currently need to acquire about 2.5-3 million tpy of HRC from other EU mills, including ArcelorMittal, according to the market sources.

This would also improve capacity utilization at Thyssekrupp’s flat steelmaking Duisburg site in Germany thanks to additional demand from Liberty Steel.

Duisburg has a projected capacity to manufacture bout 8.5 million tpy of HRC.

However, considering Liberty’s sharp focus on ‘Greensteel’ and the gradual reduction of its carbon footprint, the five Thyssenkrupp blast furnaces - which have a combined capacity of about 12 million tpy of pig iron - are likely to be replaced.

Liberty Steel has already started a transformation project at its Ostrava steelworks in the Czech Republic - acquired from ArcelorMittal - to replace the blast furnace with two hybrid furnaces as part of the Greensteel plan to become carbon-neutral by 2030.

Market sources said that Liberty Steel has not been able to source sufficient volumes of HRC for its Benelux assets, and that had resulted in significant delays to deliveries earlier this year.

Thyssenkrupp, in its turn, is also going through a major restructuring, which comprises massive job cuts, with most in the steelmaking division.

As a result of the restructurings begun and implemented in the past year, around 3,600 jobs have been already eliminated. To address long-term market developments and the consequences of Covid-19, Thyssenkrupp sees the need for the elimination of 11,000 jobs in total, measured against the starting situation. The additional 7,400 job losses will be made over the next three years, the company said.

Thyssenkrupp recently confirmed the likely closure of its heavy plate business.

In 2019-20 financial year, Thyssenkrupp’s steel unit posted a significant loss, with earnings before interest and tax in the first half coming in at a negative €946 million, down from a positive €31 million a year earlier.

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