Value steel

Past few days have seen a lot of bidding for Dofasco, the Canadian steel maker. First there was a hostile bid by Arcelor, the second largest steel co. Apparently, Arcelor wanted to strengthen its automotive steel division. Arcelor already is a major supplier to european carmakers, on the other hand, Dofasco has been a major supplier to North American carmakers Ford and GM. Probably the acquisition would create a monopoly in the automotive steel and Arcelor would be in a position to armtwist the already flagging auto industry in the West. It could also sound the death knell for US automakers. There could be a chance that GM, Ford and other US automakers might have forced Dofasco to reject the proposal from Arcelor.

As soon as the Arcelor threat was averted, Thyssenkrupp AG, the German steel maker made an offer at 40% premium to Arcelor's bid. Thyssenkrupp is also an automotive steel supplier, then what makes TK different. The only difference that I can see is that TK can add value to Dofasco's steel since TK has a service that caters to automotive design and planning which coupled with Mechatronics can be a differentiator in this old economy industry.

Should indian firms follow this model. I say a resounding yes. With demand from China set to slow down in the coming years due to the cooling of their economy there is going to be a reduction in demand for steel. Add to that the effect of falling prices due to overcapacity generated due to the highly liquid environment of the past few years, theres set to be havoc in the global steel industry.

In such a scenario, firms will survive on two counts only. Either they consolidate or they differentiate. The global consolidation game has started with Mittal steel setting the pace last year. These year will see more acquisitions. Dofasco is the first big fish this year. But will blind acquisitions aid survival? Somehow I dont think so. Primarily because these will create inefficient monopolies. But in the case of Thyssenkrupp I can see a strong value model. In fact its going the way GE went in the 90s by increasing the services component in its portfolio. There's a lot of value to be unlocked by linkages to customers (read value added service based steel) rather tha than just forcing iron down their throats.