There is a very big new kid on the block in the global steel sector, but no one quite knows what his arrival means for the neighborhood. Mittal Steel Co., an $18.5 billion behemoth that dwarfs the market capitalizations of US steelmakers, such as Nucor Corp. and US Steel Corp., is due to begin trading yesterday on the New York Stock Exchange and Euronext’s Amsterdam bourse, under the ticker symbol “MT.”

Mittal was born on Friday when Dutch company Ispat International NV completed its acquisition of LNM Holdings in the first part of a deal to create a huge new global steel group. The second phase will occur in the first quarter of 2005, when Mittal buys International Steel Group Inc. for $4.5 billion and merges it with the other assets of Indian-born steel magnate Lakshmi Mittal.

The new industry leader will outstrip current global No. 1 Arcelor in steel output at a time when steel prices are soaring on increased demand, especially in China. Mittal Steel, with businesses in Europe, Africa, Asia and the United States, will bring an international angle to consolidation in the steel industry, which has long been dominated by regional mergers.

Boost the leverage of steel

“There are some analysts who believe there will be five to 10 giants in the next five to 10 years”, said Lloyd O’Carroll, an analyst with BB&T Capital Markets. Mittal’s arrival signaled the ultimate consolidation in the steel industry, he said. “There is some logic to support that. We don’t know who will survive and how fast it will occur, but clearly Mittal is the first step in the process”, he said. O’Carroll would not be drawn on who the big players might be, but said “of the five to 10, a couple will be based in China. There is economic logic (in consolidation) and economies of scale.”

But another analyst who requested anonymity because of involvement in the ISG-Mittal deal, disagreed that global steel consolidation was inevitable in the short-term. “It’s hard to see a buying up of companies at the peak of their earnings”, the analyst said, noting the recent profitable results of steel companies.

In a research note issued after the Oct. 25 announcement to create Mittal Steel, UBS Investment Research analyst Timna Tanners said she believed most North American consolidation was over and did not view consolidation as a major near-term driver in the US steel industry. There is “no low-hanging fruit”, she said, noting that obvious candidates have already been acquired and potential acquirers appear to have other priorities.

“The 40-plus bankruptcies in 2001-2002 in North America naturally sped up the consolidation process in Darwinian fashion”, Tanners wrote. “But we believe a more profound rationalization process will take time, like the 30-year consolidation witnessed in the cement industry.”

“There are fewer steel companies ripe for the picking than in previous years”, she wrote. Charles Bradford, an analyst with Bradford Research/Soleil said the Mittal effect may boost the leverage of steel companies in contracts and pricing, in particular in the car-making industry. “With the automobile industry, there are three big players and there used to be nine steel suppliers”, he said.

“Now there are four. It makes a big change because it can make supply and demand more balanced. Price demands on steel have been one-sided in the past, now the steel companies will have a lot more leverage”, he added. Bradford said there still was uncertainty about which way the industry will go next year.

“Steel companies are telling me the first quarter and the first half look better, but customers are saying it will go sideways”, he said. “I don’t think the market was as strong in the first nine months of the year (2004) as the industry thought. Customers were building inventory and, in the last quarter, they have been buying less than they consume.”

Steve JAMES