Zacks Industry Outlook Highlights: Nippon Steel & Sumitomo Metal, ArcelorMittal, POSCO and ThyssenKrupp

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Nov 06, 2013, 09:30 ET

CHICAGO, Nov. 6, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Steel, including Nippon Steel & Sumitomo Metal Corporation (OTC:NSSMY-Free Report), ArcelorMittal (NYSE:MT-Free Report), POSCO (NYSE:PKX-Free Report) and ThyssenKrupp AG (OTC:TYEKF-Free Report).

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Industry: Steel

Link: http://www.zacks.com/commentary/29773/

Mergers and acquisitions (M&A) have remained an important growth strategy in the steel industry, leading to additional steel capacity, production efficiency and economies of scale. However, consolidation was minimal in 2012, given the current economic uncertainties in the developed economies as well as a slowdown in the emerging regions.

In 2012, a landmark deal was the merger of Japan's largest and world's sixth-largest steel maker Nippon Steel Corporation with 27th-ranked Sumitomo Metal Industries to form the world's second largest steel firm - Nippon Steel & Sumitomo Metal Corporation (OTC:NSSMY-Free Report). With a combined capacity of 46.1 million tons, the merger was targeted to generate savings in the face of increasingly intense global competition.

Despite the considerable scope for consolidation in the steel sector, companies are holding back and instead focusing on conserving cash. They are waiting for a stronger and more sustainable economic upturn to spur a wave of consolidation. They are instead focusing on shedding unproductive operations, cutting costs and restructuring.

ArcelorMittal (NYSE:MT-Free Report), the world's largest steel producer, kicked off 2013 with the sale of its 15% stake in iron ore mines in Canada for $1.1 billion to a consortium that included South Korean steelmakerPOSCO (NYSE:PKX-Free Report) and Taiwan-listed steelmaker China Steel. The divestiture is in line with the company's effort to get rid of production overcapacity in Europe as well as to reduce its debt.

ThyssenKrupp AG (OTC:TYEKF-Free Report), one of the top 20 steel producing companies in the world and the biggest steelmaker in Germany, completed the sale of its stainless steel operations Inoxum to Finland's Outokumpu for $3.7 billion in Dec 2012. ThyssenKrupp also completed the sales of its Tailored Blanks business, the market leader in laser-welded blanks for the automotive industry to Chinese steel producer Wuhan Iron and Steel Corporation in July 2013.

After incurring two consecutive years of record losses, ThyssenKrupp is undergoing radical restructuring in which it is trying to sell assets to slash debt and refocus the group on its core European business.

For over a year ThyssenKrupp has been trying to sell its loss-making Steel Americas business, which comprises steel slab plant in Brazil and a processing mill in Alabama for over a year. ThyssenKrupp has faced a succession of costly write-downs since its decision to build the plants. The sale would allow the company to focus on its core Steel Europe and engineering assets. According to latest reports, the company now intends to completely exit its American steel operations while expanding its operations in Brazil.

The long-term growth potential in Brazil remains strong. Infrastructure work will boost steel demand in the nation as the FIFA World Cup is slated to be held in Brazil in 2014 and Rio de Janeiro will host the summer Olympics in 2016. As mentioned earlier, apparent steel use is projected to rise 3.2% in the region in 2013.

ArcelorMittal also recently announced its plans to restart an expansion project at its Monlevade and Juiz de Fora sites in Brazil. The project expansion is expected to increase the annual production capacity from 3.75 million tons to 4.9 million tons.

We expect M&A activity to remain slow in 2013 until prices stabilize and the industry strikes a balance between supply and demand. Going forward, the abatement of the Euro-zone crisis, recovery in the U.S. and Chinese economy will determine the fate of such deals.

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