European mill consolidation concerns independent stockists, distributors

Mergers and acquisitions in European steelmaking could have important consequences downstream, with independent service centers increasingly nervous they will be squeezed out of the market.

Investment bank Jefferies suggests ArcelorMittal will account for 40% of European coil market supply once it completes its acquisition of Italian producer Ilva, while a merged Tata/ThyssenKrupp would have a share of around a quarter.

This increase in consolidation should be good for the mills and their pricing power, and potentially reduce the regional disparity that exists between the north and south of the continent as Ilva was often the cheapest player.

While the industry has for years acknowledged the need for supply to be more consolidated, these two major players would also own a significant portion of the downstream sector. This is making independent businesses competing with these mill-tied distribution arms increasingly nervous.

"The situation is not good for downstream independent operations. ThyssenKrupp, Tata Steel and ArcelorMittal have their own downstream operations, which make up almost 40% of the market," a service center source in Iberia said. "We are very worried with these antidumping sanctions coming, [as] it means the sourcing opportunities are less and less. At the moment, more or less, we've been able to survive, but I’m afraid that with more AD it could affect us."

Independents have already seen their supply options drastically reduced by import barriers: the European Commission will announce definitive duties on imports from Brazil, Iran, Russia, Serbia and Ukraine in the next few months, having already placed antidumping duties on Chinese hot-rolled coil.

China sold 528,000 mt of HRC into the European Union in first-quarter 2016, amounting to around a quarter of the import market during the period, according to data from European steel producers association Eurofer. But this dropped around 85% to 78,000 mt in Q1 2017, out of a total import market of around 1.87 million mt. Imports from the five countries mentioned in the separate case also slid around 60%, from 1.1 million mt in Q1 2016 to 439,000 mt in Q1 2017.

While increases in material from elsewhere (most notably India and Turkey) have to an extent offset the stark reduction from countries subject to tariffs and investigations, with today's protectionist zeitgeist, exporting countries are a constant potential target for new actions. It also remains to be seen if Marcegaglia — the main opponent to the HRC cases — will continue to lobby as hard if it has its supply guaranteed by Ilva.

One trader said the EC would be unlikely to levy large tariffs on the five countries under investigation, which could help downstream buyers and independents.

When it refused to impose preliminary duties on HRC from Brazil, Iran, Russia, Serbia and Ukraine, the EC cited potential harm to end users.

"The Commission accepted at this stage the claim that the imposition of measures would lead to a further price increase of the product concerned, at the expense of users in view of the alleged post-investigation period price increases," it said.

It also said a consortium of end users that took part in the investigation would "risk more drastic consequences in their negotiating power vis-a-vis the Union producers was much smaller."

Some expect the EC could force parts of the newly formed steel giants to cut off their distribution arms.

"I expect ThyssenKrupp to have to sell off the distribution [unit]. When you look at ThyssenKrupp and Tata, the materials they can supply to their subsidiaries, it means a number of service centers belong to both, particularly in Germany. So they will have to do that; either merge them together or offload them. … So a number of sites will close, which will be a good thing," a service center source in the Benelux said.

A source at another major independent downstream player was bullish, however, noting anything that pushes steel prices upward can only be good for them. But generally the reaction in the downstream sector is one of concern.

"If they support their own service centers that could be a big threat to the privately owned companies. It could be a big threat and the steel mills could get even more control of the market than they have today," another source said.