The new 'king' of the mountain -- Mittal Steel

The announced combination of the LNM Group companies (LNM Holdings and Ispat International) with International Steel Group would create, in early 2005, a global steelmaker with a number of special characteristics:

• Huge size. Shipment capacity of about 58 million metric tonnes per year. A number of its plants are ultra-low-cost and extremely well positioned competitively – including the facilities in Kazakhastan (Karmet), Romania (Sidex), Poland (Huta Katowice and Huta Sendzimir), South Africa (Iscor) and the United States (Burns Harbor).

• A good balance between long and flat products. Long product deliveries are about 14 million tonnes per year and flat about 38 million tonnes per year.

• Solid position in raw materials. Including ISG, about 25% of coking coal, 35% of iron ore and 100% of coke needs are self-supplied. The ownership of raw materials is a plus when considering that the international prices of iron ore and coking coal may rise by 25% and 75%, respectively, in 2005 (adding about $35 per tonne to the production cost for those steel plants that are fully paying the higher prices).

• Directly-reduced iron production of about 11 million tonnes. This capability is another major plus when considering the three spikes in steel scrap prices this year. (Note: DRI, pig iron and scrap always move in tandem.)

• A good fit between the various facilities. Imexsa, one of the world’s leading steel slab producers located on the west coast of Mexico, will be able to supply slab to some of the ISG plants. (Note: Imexsa’s key energy source is natural gas, which has caused its operating cost to surge over the years.)

THE CONSEQUENCE: More Merger Mania

The steel industry is entering a period of merger mania. Managements of steel companies understand, intuitively, that the greater the concentration in the industry, the greater the likelihood that they will have “pricing power” over a larger portion of the steel cycle.

The industry's rallying cry: "Concentrate or Die!"