What's the Big Deal
About Big Deals?

Will the recent spate of mega-mergers among raw material and steel product suppliers accelerate the consolidation trend among distributors? I don’t think so.

After a rocky courtship, Mittal Steel finally persuaded Arcelor to tie the knot, creating what is by far the largest steelmaker on the planet. Called “a merger of equals,” the new company, to be named Arcelor-Mittal, will have the capacity to produce 120 million tons of steel per year—three to four times more than any other producer.

Arcelor will own 50.5 percent of the combined company, and Mittal 49.5 percent, but the Mittal family will be the biggest single shareholder with over 43 percent ownership.

It remains unclear what will happen to Russia’s Severstal and Canada’s Dofasco. Severstal and Arcelor had agreed to merge in May, but Severstal does not appear to be as good a fit with Arcelor-Mittal, from a financial and regulatory point of view.

Arcelor outbid ThyssenKrupp to acquire Dofasco earlier this year. Arcelor still believes Dofasco can play a key role in the company’s future. Mittal Steel, however, made a binding agreement that it would sell Dofasco to ThyssenKrupp in the event Mittal acquired Arcelor. With antitrust regulators eyeing the deal, and Lakshmi Mittal in such a controlling position, don’t be surprised if Dofasco goes back into play.

Regardless of Dofasco’s ultimate owner, the Arcelor-Mittal merger will forever alter the competitive dynamics of global steel production. Experts predict a flurry of other deals in the coming few years as steelmakers combine to secure strategic footholds in various markets.

Overshadowed by the Arcelor-Mittal-Severstal story was the announcement of a deal between Europe’s Tenaris and North America’s Maverick Tube. Merging these two pipe and tube players will create a $9 billion competitor with a commanding presence in energy tubular goods.

Similarly, the North American mining industry felt a tremor last month when a three-way merger was announced between Phelps Dodge Corp., Inco Ltd. and Falconbridge Ltd. The $56 billion transaction creates a giant new company called Phelps Dodge Inco Corp., now the world’s leading nickel and publicly traded copper producer.

Speculation that service center consolidation will somehow get a boost from such high-profile mergers upstream seems unfounded. Just because the competitive landscape is shifting among producers doesn’t mean the same must take place among distributors. The two are very different businesses.

For a mill or a mine, success is about maximizing production, economies of scale and return on capital. For a service center, it’s more about being local, being responsive, and being personally involved with your customers. A service center’s biggest asset isn’t its capital equipment, but rather its customer relationships.

Regardless of their size or the new name on the letterhead, suppliers like Arcelor-Mittal will continue to depend on distributors—large and small—as an extension of their own sales forces.

Don’t be intimidated by headlines touting the latest “big deal.” Your value as a service center is not diminished by the growing size of your suppliers.