Stainless Steel Me

ThyssenKrupp, Europe’s largest stainless steel maker, will have to find creative ways to dodge anti-trust bullets as it seeks an ally to cut stainless steel overcapacity in the region.

ThyssenKrupp and rivals Outokumpu, ArcelorMittal and Acerinox have all racked up eye-popping losses in their stainless operations amidst a worldwide economic slump.

Recession-driven consolidation is a must in Europe, but with Thyssen taking the steepest margin fall among the lot, it seems the most keen to find a way out through a major overhaul of all its steel-related and technology businesses.

The company is a key consolidation driver because its nearly 3 million tonnes of annual stainless steel output and 40 percent market share make it Europe’s biggest player.

But this commanding position is likely to cause cartel problems if it combines with another big player. “The company is studying various options on its stainless business, such as a merger or joint venture, but I don’t think all options for any form of strategic alliance will be approved by the EU cartel authorities,” one company source told Reuters.

Thyssen — which also makes ships, cement plants and elevators — swung to a first-half to March pretax loss of 215 million euros ($302.5 million) from a profit of 1.388 billion, dragged by a 622 million loss in stainless division.

“There is a very strong chance it will try for a European stainless solution, with a spin-out, consolidation and a minority share in the combined entity,” said Credit Suisse analyst Michael Shillaker.

OPTIONS, CARTEL SOLUTIONS

ThyssenKrupp Chief Executive Ekkhard Schulz told Reuters in May the top four European stainless steel makers must look at what they can achieve to adjust capacity but it is not in “concrete talks” with any one.

A company source told Reuters the group has held informal bilateral talks with potential partners but nothing concrete has emerged so far. A German analyst, who declined to be identified, said Outokumpu was the most likely partner because it has a strong presence in northern Europe and Thyssen is nearly absent there.

“From the point of view of culture, Outukumpu would be the best fit,” said DZ Bank analyst Dirk Schlamp, adding synergies could also be reaped because both make flat stainless products.

A merger with the stainless steel unit of ArcelorMittal, the world’s top steelmaker, could be a solution but would come with its own challenges, both on the cartel and cultural front.

“It would be best for them to merge with ArcelorMittal,” Brokerage Steubing analyst Michael Broeker said, adding the two combined would hold around 60 percent share in Europe’s ferritic steel grade and 30-35 percent worldwide.

“European authorities are a little bit nervous on anything above 40 percent. That could be solved if ThyssenKrupp closed its plants in Italy,” Broeker said.

Kepler analyst Rochus Brauneiser said his favoured scenario is either with ArcelorMittal or Acerinox but Deutche Bank’s Luis Fananas Martinez said the Spanish company is not keen to boost its assets in Europe.

“Acerinox has been investing in the last 15 years elsewhere but not in Europe,” said Martinez.

Plant closures however are a must in any constellation in order to change the European landscape.

“I think another issue here is that if there would be any merger or any joint venture in the sector, it would not necessarily solve the overcapacity problem in Europe. The plants would still be there. An issue is who would be willing to close down these plants,” said Matthias Hellstern, analyst at rating agencies Moody’s.

Hellstern also said a key aspect is whether anti-trust authorities would view the stainless steel market in Europe from a worldwide perspective, which would then increase the chances of getting a green light from Brussels.

“I think a big question is whether the cartel authority in Brussels would consider any merger or any joint venture from a regional point of view or whether it would be viewed from a worldwide perspective.

“If it is a regional one, then there are four players in Europe. A worldwide view means there are several players,” Hellstern said.

PRESSURE FROM THE BIGGER REVAMP

The search for a solution for stainless steel comes at a time when ThyssenKrupp, formed from the merger of two German groups in 1999, wants to cut its divisions to two from five.

Any delay in the stainless steel solution will hold up the whole group revamp.

“As long as alternative options have not been decided, a thorough restructuring will not be brought forward,” said BHF analyst Hermann Reith. ThyssenKrupp has said it wants to present a revamp concept of its conglomerate structure before the fiscal year ends in September and the company source said a concept on its stainless business could be submitted at the next supervisory board meeting on Sept. 4.

Reuters