Steel not for barons
Amidst the din of birthday greetings for the two tycoons, Mittal and Tata, certain underlying trends in the evolution of the steel industry went unnoticed. Mittal's flight to the top energised Tata's mountaineering skills so much so that he is within reach of the fifth slot, if CSN falters. For the media, the two oozed the virility of the third world's new entrepreneurial class. New East-India companies, this time from the east, are on the prowl in the west. So we are told.
But history tells us that the steel is not so malleable. The industry never brooks critical mass. Remember US Steel? For nearly 100 years till 1970 the world's largest steel company was number one in manufacturing too. Its plans for a new state-of-art factory never went beyond a golf course in the early 70s. All of a sudden it stopped growing and was down though not out.
The plight of US Steel was shared by other steel companies at commanding heights in America and Europe. On the stock exchanges, they lost the blue chip label. Across the Pacific, in Japan and South Korea, steel companies held out thanks to cheap currencies and tariff and non-tariff protection.
Why the major steel companies dehydrated? Not that the demand for steel was tapering off. Far from that. The steel production is still on a steadily rising curve, the average growth rate being 4% a
year. Despite competition from plastic and aluminium its world production is well above the one billion tonne mark. New mills are also coming up.
Steel is thus a durable investment. So it is amazing that, even in decline, the steel companies never inspired cross border attention. User industries like automobiles and shipbuilding also shunned them though there was good scope for vertical integration. Even when the American assets went for a song in the 80s under the weight of falling dollar putative raiders kept away.
Such disinterest in the ailing behemoths can be traced to the industry's transformation catalysed by cutting edge technology. Small and medium units, with locational advantages, offered deadly competition as they saved a lot in cost of transportation, labour and niche products. US Steel's show down (on pricing) with President Kennedy was the last time it upped its ante. The shape of the industry was never the same thereafter. Market forces humbled the giants everywhere.
The third and fourth rung companies in the west being taken over were also under siege and sinking. The acquisitions are leveraged by a combination of factors including favourable exchange and lending rates and calculations of raw material supplies. It is also a fact no one else would have touched them. Now what is unseen is the promise of synergy. The integration of companies, an uphill task, could take a long time and may never take place even.
Near term the world steel market must reckon with China. With a production of 350 million tonnes China accounts for over a third of the world steel output. India and Brazil, each with a tenth of the Chinese production, will not catch up so soon even with their new plants on stream. Its domestic market, still booming, China has not pepped into the export market. Once its comes over, market forces will reassert leaving the new barons an endangered species. The next hiccup in world steel industry will be crucial. Then the barons will return to the headlines but for other reasons.
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