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Mittal and Arcelor. Do they t? January 2006One thing you can say about the Mittal amily is that they think big, and they never ail to surprise! Theannouncement o a bid or Arcelor came out o the blue or most industry analysts. Mittals strategy has alwaysbeen to grow by acquisition the worlds biggest producer has never yet built a steelworks but the targetthis time was certainly unexpected.

The synergyFrom an operational point o view, there are clear advantages to both companies in a merger o this sort. Theregions o the world where they would have signi cant market share include the established markets o NorthAmerica and Europe, together with the growing emerging markets in South America and A rica.

Mittal on their own just do not have the acilities in Europe to challenge the high-end auto market, despitemaking fat products in Romania, Poland and the Czech Republic.

Arcelor, on the other hand have only a small oothold in the North American fat products market and havelittle in-house supplies o iron ore. (This was about to change however see below.)

So, apart rom in Asia, the two combined would be dominant in high-value production and this would becomplimented by Mittals low-cost commercial steel production in central Europe and elsewhere. They wouldbe getting closer to the one-stop-shop (though the value o this can be debatable).

One o the relatively ew markets where they compete is in heavy sections in Europe. However, Mittal are meantto be closing their heavy section mill in the Czech Republic as part o the restructuring plan agreed with theEU at accession.

In general, Arcelor have the richer product mix with average revenues per tonne much higher than those o Mittal. This is because around 70% o their output is fat products (much o it cold rolled) and stainless steels,whilst Mittals mix includes about 20% o low-value semi- nished products.

Another aspect o synergy is related to the availability o in-house raw materials. Along with their steelcompany acquisitions in Kazakhstan, Ukraine, North America and Bosnia Mittal obtained signi cant reserveso iron ore. They are actively planning new mines in A rica and South America. By contrast, and i the Do ascobid does not go ahead, Arcelor have very little. This is an area where cost savings will occur both through theredirection o raw materials as well as stronger purchasing power with respect to external suppliers.

What does it mean for Arcelor?A ter a disappointing year when they ailed to acquire Kryvorizhstal and (initially) Erdemir, things were juststarting to go well or Arcelor. They came to a deal with Oyak, the buyers o Erdemir, or a minority stake andhave just won control o Do asco. These two investments give them an extension into other parts o Europe,complementing their existing acilities in Turkey, a oothold in the North American high-end market, and asource or iron ore in the shape o Do ascos Canadian mines.

In many ways, this gave them most o what they were looking or certainly or now. A success ul integrationo these companies into their existing network would have rein orced their position as the worlds No 2 steelmaker, and probably the worlds No 1 in the quality market.

What does it mean for Mittal?Although there are signi cant gains or Mittal, one cannot help wondering whether their bid is partly or

de ensive reasons. The last thing they wanted was Arcelor to win Do asco and the timing o the bid musthave been a ected by Arcelors success in beating TKS to this acquisition.

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That said, they gain improved R&D and product development abilities as well as quality steel making in Europe. They also get a di erent image. Until now (and with some exceptions in North America) they have thrivedon turning around bankrupt or poorly managed companies. They have done this very success ully, but theproblem is that the fow o such companies has slowed in recent years as the transition process and relatedprivatisations have dried up.

This has meant them turning to more established companies. I they had wanted to enhance their position inEurope, and had chosen Corus or Riva as their target, one would have been less surprised. Either would haveled to an easier ride with competition authorities and would have been easier to absorb. Arcelor, on the otherhand, is big and rather corporate in the way it operates. How the cultures blend together will be a key elemento whether the bid (i success ul) leads to extracting the promised synergy.

Arcelors board will be mi ed that there was less communication prior to the announcement and this will makeit more di cult to secure a smooth transition in the event o their o er being accepted by shareholders.

What does it mean for the industry?For years analysts have been complaining o the lack o consolidation within the industry. Lack o productiondiscipline during times o weak demand is certainly one o the reasons or volatile prices. Any increase inconsolidation may there ore bene t the whole industry.

It will also spur on the other big companies to look or suitable partners. The world has our main regions whenit comes to steel production:

China is obviously the largest and will not be greatly a ected by the merger. (Both companies have intereststhere but even when combined they will still be small players in the Chinese market.) I anything, it mayencourage the companies and the Government to move aster in consolidating what is a very ragmentedsector.

The big Japanese and Korean companies dominate the rest o Asia, albeit alongside many smaller producers.Nippon Steel, JFE and POSCO are all in the current top-10. They will be nervous that they are alling behind theglobal giants and, i the merger goes ahead, might be encouraged to orge links with a European or Americanproducer.

Russia is still the big net-exporter o steel. It has cheap ore, coal and other energy and its companies are lookingto expand beyond the region. They need good nishing end acilities - close to the market but where steelmaking costs are high. They will either look to pick up smaller stand-alone mills, or integrated companies whereit might be advantageous to close their heavy end.

Finally there is the rest o the world. The big companies are Corus, TKS, and Riva in Europe; Nucor and US Steelin North America; and Gerdau in both North and South America. These companies will certainly be looking orpartners in the coming months and years in order to be able to compete with the potential new giant.

So, do they t?

The answer, o course, is yes in many ways: certainly in terms o geographical and product coverage, andcertainly in terms o the raw materials bene ts accruing to both companies.

On the other hand, the Group will be big but not terribly ocussed. Arcelor have in the past valued their ocus,perhaps more than anything, whilst Mittal have been prepared to produce any steel product that can turn apro t.

As, described above, the irony is that Arcelor were just getting their act together in terms o increasing their sizebut retaining their ocus. They will ght hard to promote that vision to their shareholders.

Global Steel Consultants are not investment advisors andthis article speci cally does not comment on the termso the proposed merger; or on the nancial bene ts toshareholders in the two companies involved.Global Steel Consultants is a network o independentsteel specialists who specialise in strategic planning, steelrestructuring, due diligence and project appraisal.