Oligopoly Watch

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It is interesting that right after the announcement of the Arcelor-Mittal Steel merger, institutional speculators in the financial markets began predicting that Corus was next on the list in the process of centralisation of capital that has been underway in the global steel industry. Tata Steel was indeed in the reckoning of likely bidders for Corus, the others mentioned were Severstal and Everaz of Russia and Thyssen Krupp of Germany. From the point of view of high finance, ever since the structural crisis in the steel industry since 197475, the larger question has been that of dealing with the depressing tendency of product market competition (mainly from imports) on the value of the portfolio of the steel stocks held by finance capital. Importantly, high finance in the City of London seems to have brokered the friendly deal between Tata Steel and Corus.

A question that, however, remains unanswered is why the Tata offer has not brought forth the expected rival bidders from Germany and Russia. And the top management and board of Corus formally accepted Tata’s takeover bid without much of a fuss, even though significant institutional investors of the company’s stock, Standard Life Investments and Axa European Opportunities Fund, said that Tata’s offer price was too low and that some other steel industry rivals could react. CSN of Brazil, advised by Lazards, is said to be taking a second look. Standard Life was, of course, expecting the entry of rival bidders to move the offer per share upwards to 600 pence from the Tata’s 455 pence offer. Yet, so far Tata Steel’s rivals have not even entered the fray, let alone offered a substantial premium.

The Corus Group, headquartered in London, was formed through the merger of Koninklijke Hoogovens of Holland and British Steel in October 1999. The latter, the UK’s largest steel producer, it may be recalled, was formed in 1967 as a result of the nationalisation and consolidation of a number of private sector steel companies, only to be subsequently privatised in 1988 by Margaret Thatcher’s government. Tata Steel, established in 1907, successfully underwent a process of learning by doing during the inter-war period, as reflected in the cost data of the tariff commissions of the time. After a long period of technological stagnation in the post-independence period, the company renewed itself and emerged as the lowest cost producer of steel in the world at the turn of the 21st century. Recent acquisitions have made it a transnational corporation – the acquisition of Singapore’s NatSteel in August 2004 and Thailand’s Millennium Steel last year. The company has huge “greenfield” projects in the planning stage – a six million tonne per annum (MTPA) plant at Kalinganagar in Orissa, a 12 MTPA plant at Tontopossi in Jharkhand, and a five MTPA plant in Chhattisgarh. Its international expansion plans include steel plants in Iran and Bangladesh, coking coal blocks in Australia, and iron ore mines in South Africa. The present acquisition will hopefully bring together the low cost crude steel making of Tata Steel with Corus’ technological advantage and rolling-cum-processing mills supplying finished steel to its sophisticated European downstream manufacturing customers.

Corus was Europe’s second largest steel company after Arcelor-Mittal and eighth in the world, while the Tatas were number two in India’s steel industry and 52nd in the world. The takeover will make the combined company the fifth largest in the world. The question that now arises is: What may be the possible response of other Big Steel in the global consolidation game? What seem to be already under way (i e, even before Corus’ acceptance of the Tata Steel takeover offer) are moves among Asian steel companies to discourage outside bidders. Nippon Steel and POSCO have raised their cross-equity participation stakes. Japan’s JFE Steel Corp has raised its equity stake in South Korea’s Dongkuk Steel from 4 per cent to 15 per cent of the latter’s paid up capital. Nippon Steel is considering an enhancement of its stakes in fellow Japanese steel makers, Sumitomo Metal Industries and Kobe Steel. How may the north American steel giants like US Steel and Nucor Corp respond?

National pride may have swelled with the rise of Mittal Steel and Tata Steel as giant corporations in the global steel arena, but in order to discern the consequences in terms of the public interest (national and global), one needs to engage in a careful oligopoly watch.

EPW

Economic and Political Weekly November 4, 2006