S&P Equity Research sees continued steel industry consolidation

Despite Mittal's acquisition of Arcelor, Standard & Poor's Equity Research Services sees the global steel industry further consolidating over the next several years. These and other findings are available in a semi-annual report on the metals industry, Metals: Industrials Industry Survey, published by Standard & Poor's.

S&P's Equity Research sees Commercial Metals, Quanex Corp., and Steel Dynamics as potential acquisition candidates. In S&P's opinion, Commercial Metals has attractive assets in steel manufacturing, steel fabrication, and scrap recycling. Quanex appears attractive for its strong market position in engineered steel bar and its ample free cash flow. Steel Dynamics has low-cost steel-making operations and a diversified product mix serving the automotive, distributor, and nonresidential construction markets.

S&P believes several companies in this industry have the financial wherewithal to make acquisitions, with the most likely acquirers being Nucor Corp. and U.S. Steel, which may be looking to improve and expand their capabilities in certain markets.

"Sharply rising costs for raw materials such as iron ore and ferrous scrap are creating pressure for companies to merge. Steel producers have to become larger in order to have greater clout to obtain more favorable contracts from the iron ore miners. Also, larger companies would have the greater financial strength required to engage directly in iron ore mining or manufacture substitutes for ferrous scrap," said Leo Larkin, senior metals and mining analyst, Standard & Poor's Equity Research Services. "The imperative to reduce raw material costs will, in our opinion, result in further industry consolidation."