Fitch for consolidation in steel sector for better pricing power

Fitch Ratings on Wednesday said further consolidation of the global steel industry is needed to enable leading steel makers have more say in price determination than raw material suppliers. It said the profit margins of steel companies in 2005 will be adversely affected if the increased cost is passed on to consumers.

The recent negotiation between leading steel manufacturers and major mining companies over annual iron ore price has resulted in sizeable cost increase for steel companies from April, Fitch said in a press release issued here.

"Steel producers appear to have been so anxious to secure iron ore volume such that pricing considerations have been of secondary importance. The costs of other steel-making raw materials, notably coking coal and scrap, have also been high," says Sonya Dilova, associate director in Fitch's Industrial team.

"This is a clear demonstration that mining companies have maintained the balance of power despite ongoing steel sector consolidation in recent years," Dilova said.

It said in 2004, steel makers passed on the higher cost to consumers with annual price increases reaching about 20 per cent.

"This relatively greater degree of pricing power towards end-customers also reflected concerns of steel consumers about securing volume rather than price," it said.

However, it said in 2005, profit margins of the steel company will come under pressure if companies passed on the entire burden to consumers as the "willingness or ability of the consumers to continue to accommodate further increase may be limited."

Fitch said although consolidation in the steel industry was witnessed last year, the sector remains fragmented.

In 2004, the top 10 steel companies accounted for only 26 per cent of world steel output against about 70 per cent market share of the top 10 iron ore producers.

"Such fragmentation of the steel industry means that even major players still have weak pricing power relative to the much more concentrated raw material suppliers," it said.

The major consolidation deals that took place last year included formation of Mittal Steel Company NV, Arcelor's downstream consolidation through an increased 62 per cent stake in Brazil-based CST, and Severstal's acquisition of Italy-based Lucchini and the US-based Rouge Industries Inc.