Metals Market Posts
‘Going Fishing’ Signs
By Tim Triplett, Editor-in-Chief
Merger and acquisition activity in the metals sector promises to churn anew in the second half, say some experts, despite a market that was stagnant such a short time ago. While the receding economic tide has lowered all boats, some remain shipshape while others have taken on dangerous amounts of water. The more seaworthy among them are likely to embark on fishing expeditions soon in the hope of hooking a competitor or two.
Many of those competitors are eager to take the bait, having lost the appetite for a new round of risk-taking after struggling to stay afloat. Even those willing to reinvest in their businesses may find their banks are reluctant to lend them the capital they need to replenish their inventories and provision themselves for the rebound.
Debt capital is becoming more available, however, at least to companies with few other liabilities, reports Deloitte’s John Jazwinski in this month’s Business Topics column. In addition, service center valuations as a multiple of earnings are nearing their long-term average once again, motivating both buyers and sellers. Buyers are looking for good deals and naturally want to pay less than the historical average, while sellers hope to cash in above that mark. The closer their expectations are to meeting in the middle, the more M&A activity we are likely to see, says Jazwinski.
Some of the deals may not simply entail larger service centers buying up smaller ones. Mills seem to have a growing interest in the processing business. The most recent example is Nucor, which announced a joint venture with Mitsui earlier this month. The two companies formed a new entity, NuMit, which now owns Mitsui’s Steel Technologies, a leading steel processor in the U.S., Canada and Mexico. Steel Technologies gives Nucor a stronger foothold in the automotive market and a vehicle to expand internationally. Steel Technologies will now build the processing center in Monterrey, Mexico, previously announced by Nucor.
This should not be cause for alarm among distributors. Mills investing in downstream processing is nothing new. Leading steelmakers including U.S. Steel, Severstal, ThyssenKrupp and AK Steel all have ventured into various processing niches in the U.S. and abroad. To worry that this trend will inevitably lead back to the days when mills produced, processed and distributed their own products is an oversimplification of a very complex marketplace. Service centers will remain an integral part of the supply chain as long as they keep doing what they do best—and do it better than anyone else.