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From Consolidation to Construction: Factors Influencing
Global Steel and Coal Markets
BHP Billiton, Mittal Steel, Arcelor SA and Puda Coal Position Themselves
on the Worldwide Stage
By Jennifer Lee and Ann-Marie Fleming
April, 2006
www.China-AsiaStocks.com
According to the Worldwatch Institute, based in Washington, D.C., “China now
produces 27 percent of the world’s steel- an essential input to its
mushrooming industrial and urban infrastructure, as well as to the
production of automobiles and other manufactured goods.” As coking coal
continues to be vital to the production of steel, the impact of growth in
China’s industry could be substantial given the increase in activity in this
sector. With the continued expansion of the global steel industry, its path
of development can be traced through the activities of many of its
participants such as BHP Billiton (NYSE: BHP), Mittal Steel (NYSE: MT),
Arcelor SA and Puda Coal Inc. (OTCBB: PUDC).
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The National Development and Reform Commission of China reported last year
that, “crude steel output amounted to nearly 165 million tons in the first
half of this year, up 28.3% from the previous year.” With all of the
qualities of an emerging market in place, China continues to capture the
attention of analysts worldwide. The growth and development of such a
nation, presents many indicators to investors, on just how quickly things
are changing.
As coal continues to play a role in the production of steel, the
impact of growth in China’s construction industry could be substantial
given the increase in activity in this sector. According to Zhao Ming,
Chairman and Chief Executive Officer of Puda Coal Inc. (OTCBB: PUDC),
a Chinese supplier of premium grade coking coal to the steel making
industry, “Steel is vital to the construction of rail systems, bridges,
ports, airports, and car production, all of which are fueling the
booming Chinese economy and its steady growth of 28% per year.”
The Organization for Economic Cooperation and Development (OECD)
released their forecast at the OECD/International Iron and Steel
Institute (IISI) conference. Their report on the gathering claimed that,
“participants heard how the strong market has boosted financial
performance in the sector and has sparked interest in new steelmaking
capacity. The improvement has helped to facilitate consolidation in the
industry – which nonetheless remains highly fragmented.”
Out of the OECD/IISI proceedings, one of the principal points raised was
that, “the outlook for 2006 remains good as world steel consumption is
expected to increase by the continuing strong growth in demand in China
where steel consumption is expected to increase by another 10.7%.”
According to Graeme Hunt, President of BHP Iron and Ore at BHP
Billiton (NYSE: BHP) in a recent presentation given at the Global
Iron Ore & Steel Forecast Conference, “total production is expected to
rise to around 380-400 million tons from 2005 total of 348 million tons.
Steel production capacity migration to the south (away from the domestic
iron ore mines and closer to discharge ports) and the recently released
Chinese steel policy imply that the percentage of China’s seaborne iron
ore imports will continue to increase.”
“Our strategy is to explore established areas with new technologies and
to increasingly explore new ground in emerging countries,” explains
Tracey Whitehead, Manager of Investor Relations for the Americas for BHP
Billiton.
Exploration in China
Mittal Steel (NYSE: MT), currently present in China and
establishing an increasingly solid presence there, has expressed their
viewpoint on China’s stance on the global podium, with respect to the
steel market. A Mittal spokesperson states, “We see demand remaining
strong in the forthcoming year. This is a key strength of the Chinese
market, along with low labor costs. However, there are also several
weaknesses, which we believe lessens its competitive global position
including a dependence on iron-ore imports, high energy costs, low grade
products, an inland industrial network and environmental issues.”
She furthered that, “there has also been much speculation about the
dangers of China continuing to increase production and becoming a net
exporter of steel. This remains a situation that requires careful
monitoring, however we continue to believe China is not a natural
exporter of steel. As the world’s largest and most global steel producer
the Chinese market is of natural interest to Mittal Steel. We were the
first foreign steel producer to have a production presence in China when
we completed the acquisition of a 36.67% stake in Hunan Valin Steel Tube
& Wire Company last year. We view this as being a platform for our
further growth and are ready and willing to further participate in the
consolidation of the Chinese market.”
However, as coal remains closely tied to industry in the country and
development continues to incline, we may see coal become a viable
indicator of China’s status amidst other global markets. China’s coal
prices remain high in 2006 and are expected to maintain an increased
status over what was achieved in 2005.
Puda Coal Inc. is one of the largest suppliers of top grade coking coal
in Shanxi Province- a region that supplies nearly 50% of China’s coking
coal. Zhao Ming believes, “China’s continuous development creates
sustained demands on basic materials, such as steel and energy related
products, that can be derived from coal. Puda’s business strategy is to
focus currently on clean coal, which is a key ingredient in steel making
and expand strategically in the future to include energy related
products for manufacturing.”
Zhao Ming described the coal industry as being moved to a large extent
by, “mass construction of infrastructures, including but not limited to
real estate development, extended urbanization process, west region
development and the 2008 Olympic Games in China.” Puda’s aim is to sell
directly into these industries, to provide the necessary supplies as
China expands its urban centers and public venues.
When asked for Mittal Steel’s viewpoint on exploration in China,
Vaccarino told InvestorIdeas, “Mittal Steel is one of the few vertically
integrated steelmakers in the world and we see it is a key part of our
business strategy. We continuously invest in iron ore and coal mining
facilities that complement our business as it secures supplies and helps
us improve our margins. China has significant coal resources and demand
for coal is growing.”
In addition to coking coal, the demand for iron ore, another
steel-making raw material, has also felt upward pressure from the growth
in the global steel market. Alan Heap, Analyst for Global Commodity
Research for Citigroup Investment Research states, “Global demand for
iron ore is continuing to increase and run at record levels and the
growth of the Chinese market continues unabated. Speculation abounds on
what’s going to happen to prices in 2006 – Are they going to rollover,
increase or decrease? It is certainly exciting times in the market. Add
to this, strong markets in the rest of Asia and soaring steel demand in
the US and we have a recipe for a record breaking year in 2006.”
Mergers and Acquisitions
This year, many factors are at play on the global stage, with respect to
the steely commodity. Mittal Steel has been in the news recently for its
proposed acquisition of Arcelor SA, a leading steel producer in Europe
and Latin America. This transaction would produce the industry’s first
“100 million ton plus steel producer,” according to a press release
issued by Mittal Steel. The proposed merger still awaits regulatory
approval.
U.S. Steel CEO John Surma commented on the deal that if Mittal’s
proposal to acquire Arcelor succeeds, "Mittal will create a
127-million-[net]-ton steelmaker, with a 10% share of the global steel
market. Ironically, Mittal's success as a global consolidator only
serves to underscore the industry's persistent dilemma: It remains
fragmented. Industry fragmentation has been a leading driver of the
recent succession of mergers and acquisitions across the industry, and
will likely spur ongoing pressure to consolidate."
Despite the regulatory debate, this year’s development on the M&A
forefront could produce some interesting results for China’s steel
industry overall. Keeping a close eye on consolidations in 2006 could be
of aid in observing how this transcends.
As major steel and coal producing companies in China continue to follow
a growth track in the country, 2006 could produce some interesting
results. The development potential could end up supporting a shift in
these global industries and keeping an eye on how these major companies
continue to view opportunities in the country, may serve as a good gage
on where the market is headed over the following years to come.
Jennifer Lee
Jennifer Lee has a degree in English Literature from the University of
British Columbia. She holds a publishing certificate from Simon Fraser
University and has worked at both Vancouver and Western Living
magazines, as an editorial intern. She began her career in business
writing and reporting as a writer for DMR Consulting Group, on mergers
and acquisitions taking place in the market during 2001. She now works
as a freelance writer and editor in British Columbia.
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