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Global steel industry's 'zombie' rescue addiction

The strong upturn in international steel prices since late 2016 has somewhat clouded over the fundamental problems that continue to hamper the industry, including overcapacity.

Recent Chinese capacity closures have been well chronicled. However, few have noted the reality that global steel production actually expanded in 2017.

Before the latest upturn, steelmakers failed to use the previous downturn to clear away unviable businesses and leave a healthier industry. It seems a number of companies chose to navigate the tough times by simply avoiding the closure of outdated or unnecessary capacity.

And these rescues could act as a drag on the sector going forward.

While many historical heavyweights have disappeared over the years -- remember Carnegie Steel, Bethlehem Steel or Corus? -- numerous "zombie companies" have managed to cling on, attracting multiple rescue bids and takeovers.

Following years of limited merger and acquisition activity, companies now appear flush with cash and willing to spend once more. Price increases have bolstered steel producers' margins, while low interest rates and a recovering banking sector have made borrowing to invest cheaper and more accessible.

The stricken state of many companies following the 2007-2008 crash also meant a number of assets were available on the cheap.

But while some assets can be turned around, it can be an expensive and high-risk strategy. And the business case for some can easily be questioned.

In the recent past, Russia's Mechel invested heavily in European assets before losing money and withdrawing to the safety of its domestic market. US Steel made its own overseas retreat, having exited its Serbian business in January 2012, while chatter continues to circulate regarding an imminent offloading of its Slovakian works.

Established brands like Germany's ThyssenKrupp now appear to be looking for ways out of the steel industry, preferring to focus on higher-margin endeavors. But where old money is leaving, new money is entering.

The most active new player has been Liberty Steel. A group that until recent years was known mostly as a trading house has since gobbled up a number of bankrupt assets across the UK before going on to rescue the bankrupt Arrium assets in Australia.

Most recently, Liberty announced plans to increase its presence in the US, having acquired a wire rod mill from ArcelorMittal. The facility has been a perennial loss-maker, with the local government itself seemingly unconvinced of its viability and looking at one time to redevelop the site.

In India, debt-laden Essar Steel and Bhushan Steel Ltd are subject to bids from a number of major domestic producers. One of those, JSW Steel, is also seeking an entry into the European market, having expressed interest in Italian longs producer Aferpi.

JSW previously sought the Ilva assets now being acquired by ArcelorMittal. Ilva had been kept going by Italian state aid before ArcelorMittal launched its bid. Major investments still are needed to address environmental concerns there.

And China's Hebei I&S (Hegang) has also started looking to invest abroad, including pumping hundreds of millions of dollars into US Steel's former Serbia site.

Expansion through acquisition can be successful and address the fragmented nature of the global industry -- one of the reasons why steel prices have been so volatile and overcapacity is such an ongoing problem.

Arguably, ArcelorMittal has now steadied the ship and made a success of its massive expansion a decade ago. In the US, current Secretary of Commerce Wilbur Ross profited hugely from rescuing stricken steel assets and selling them to ArcelorMittal.

But there are lessons to be learned from recent history, as well.

Buoyed by economic strength and growth in Thailand's car industry, flat steel re-roller Sahaviriya Steel Industries (SSI) acquired Teesside Cast Products in 2010 in a $500 million deal that was part of its bid to vertically integrate.

Producing slabs in the UK, one of the most expensive regions to make steel, and shipping it to Thailand for rolling appeared a forlorn plan to many industry pundits at the time. And a subsequent crash in steel prices led to the mothballing and liquidation of the plant in 2015.

As new capacity is brought online with modern equipment upgrades in China, Southeast Asia and the Middle East, older assets become capital-intensive investments as they need to upgrade to keep up.

If mills fail to remain competitive, such investments can quickly become ill-fated when -- inevitably -- that next market downturn arrives.