|
Is steel the best steal?
|
 |
March 17, 1998: 7:03 p.m. ET
Forging ahead, the steel industry comes of age in a merger-manic world
|
NEW YORK (CNNfn) - Mention the steel industry to many investors and the first thing that pops to mind is metal fatigue. But Ispat International NV, a global steelmaker headquartered in London, sees only mettle.
At a time when demand for U.S. steel is, to borrow the term favored by many analysts, "insatiable", prices of leading steel stocks continue to languish in a mid- to low-20s range. At that level, steel watchers say, they may be considerably undervalued.
Hence, argue industry observers, Ispat's (IST) reported interest in acquiring Inland Steel Co. (IAD) the sixth-largest U.S. steelmaker with estimated shipments of five million tons annually.
"Ispat is saying, `Look, there is not going to be an Asian problem - in fact, we think the next two to three years is going to be fantastic, and we're willing to pay a premium of two to three dollars above stock price' to make a point," said Kenneth Hoffman, a New York-based steel analyst with Prudential Securities.
Earlier, Inland Steel agreed to sell its Inland Steel Co manufacturing unit to Ispat in a cash-and-debt transaction valued at $1.43 billion
Analysts said an Ispat-Inland combination would spawn a metal-making monolith able to tap into Ispat's worldwide matrix of production mills in locales ranging from Germany and Canada, to Ireland and Kazakhstan.
But beyond the merger's mathematics, analysts say Ispat's transatlantic courtship of Inland - if true - underscores the very type of globalizing trends that will increasingly drive steel companies to consolidate.
Since January, mergers have gained momentum in the industry. Bethlehem Steel Corp. (BS) agreed earlier this year to buy Lukens Inc. (LUC). Bayou Steel Corp. (BYX) and Northwestern Steel & Wire Co. (NWSW) - two mini-mills -- also agreed to merge.
A latecomer to merger-mania
The steel industry, they say, is simply a latecomer to the merger-mania that has gripped corporate America in the 1990s. Its tardiness is rooted in a legacy of state ownership and heavy debt that many steel companies have been hard-pressed to jettison.
Yet now, that is changing fast, according to Michael Gambardella, a steel analyst with J.P. Morgan..
The worldwide market for steel ownership, Gambardella said, has shifted dramatically in the past couple of decades from predominantly state proprietorship, to the private sector. As recently as ten years ago, 70 percent of the integrated steel industry's assets was in state hands. Today, that number has plunged to 20 percent.
"The balance sheet of all these companies to put it mildly, have gone through a cleansing," said Gambardella. Plus, having the state as your primary customer tended to act as a disincentive to many companies to introducing new technology or otherwise upgrade their production lines.
"There was no rationale to try to consolidate and compete," Gambardella said. In the U.S., where most steel companies have been privatized for several decades, the shift was not a direct issue. But it affected the global steel business by enabling foreign companies that went private to refocus their sights on building for the future, rather than paying off debts from the past, analysts say.
In the U.S., steel companies saddled in the past with underfunded pension obligations are beginning to bail themselves out, thanks to booming demand and reduced costs.
Surging demand, lower costs
Gambardella cited National Steel Corp., the fourth largest integrated steel company in the U.S., which paid over $50 million in interest on its pension obligations as recently as 1994. Today, the obligations have been erased and the company is turning a profit, Gambardella said.
But perhaps the largest impetus for steel companies to consolidate, experts believe, is the need to meet surging global demand at lower cost. "The U.S. is undercapacitated in steelmaking," said Michael Locker, the president of Locker Associates, which publishes the Steel Industry Update, a trend-tracking newsletter.
A recent newsletter noted that U.S. steel shipments are expected to remain "firm" at 105 million tons in 1998. Sheet price levels, it added, are expected to be only one percent below last year's levels in 1998, while sheet spot prices appear to be strengthening.
The newsletter traced the brightened outlook to "an insatiable demand for steel" in the U.S. economy, where construction starts and automobile sales - two major consumers of steel - are soaring. It also said that November inventories in steel warehouses were at their lowest levels since March 1997, a sign that a glut of steel imports from limp Asian markets had not materialized.
"The demand for steel has grown faster than people anticipated," Locker told CNNfn. But, he added, the fundamental factor nudging companies towards consolidation is "too many suppliers and a narrowing number of buyers."
As big companies consolidate elsewhere in the country, the number of entrants to the steel industry has expanded, propelled by the advent of so-called mini-mills, which produce steel from scrap at lower cost. This increase has exerted price pressures on the steel market.
Mini-mills don't pose threat
Locker said the mini mills have added 17 million tons of capacity since 1988. But he downplayed the threat that they pose to the integrated companies, noting that demand would more than keep pace with supply, especially as China emerges as a major consumer in the next few years.
"I think we're going to have a world crunch in steels," he said.
Hoffman agreed.
"World steel demand has been better than expected, the market is getting tighter, steel prices are rising pretty quickly," he said. He added that "1998 is shaping up to be one of the best years ever for the industry. Most of these stocks can run anywhere from 50 to 100 percent higher in the next 12 months."
For skittish investors looking to load up on promising equities, Hoffman has some simple advice, and it's not plastics - but steel:
"We're basically saying take the truck and back it up and fill it up with these things - the steel industry is a great value."
-- by staff writer Douglas Herbert 
|
|
|
|
|
|
SteelNet
|
Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney
|
|
|
|
 |
|
