High cost of iron ore and coal hurts steel producers
Friday, 20 June 2008
Julie MacIntosh in New York and Neil Hume and Peter, Marsh in London
FT Syndication Service
Rocketing prices for coking coal and iron ore, the two main components of steel, have left steelmakers shell-shocked. But the price spikes have lit a "For Sale" sign atop the coal mining sector, and a range of assets could change hands this year.
Some of the world's biggest steelmakers, after divesting their coal and iron ore assets over the past decade to adopt so-called pure-play strategies, are now reversing course to gain more control over raw material supplies.
The price increases, triggered by disruptions in some coal supplies and growing steel demand, are also prompting consolidation within the sectors that supply the raw materials.
Accordingly, the entire coking, or metallurgical, coal sector is being combed over for takeover targets, which could include companies with mines in the three main US regions that yield high-quality coal, sources close to the industry say.
"It's fair to say there are a number of North American coal companies up on the block," according to one banker familiar with a range of sale processes.
Thanks to the run-up in coal prices, even companies that produced no cash flow last year could end up selling for several billions of dollars, the banker says.
"Everyone is for sale at a certain price," says Ted Pile, of Alpha Natural Resources, a coal miner in Abingdon, Virginia, which went public in 2005 and has a market capitalisation of $6.5bn.
"Consolidation has to happen within the industry," Mr Pile said.
ArcelorMittal, the world's largest steelmaker, is moving aggressively to boost its self-sufficiency within the market for coking coal.
The company, which meets just one-sixth of its own coal requirement, agreed last month to pay $606m for a 14.9 per cent stake in Macarthur Coal, the Australian coal miner, and might target US companies, industry sources say.
Arcelor's bidding competition could be steep, even though a sharp increase in publicly traded US coal producers' share prices could give some potential acquirers pause.
Apart from the steel producers, mining giant Xstrata has aggressively bought coal assets over the past year.
Rivals Vale and Rio Tinto could circle various assets, and US companies Arch Coal, Peabody Energy and Consol Energy could try to strengthen their market positions.
Potential targets could include companies such as Alpha Natural or fellow Appalachian miner Massey Energy - which are large producers of both metallurgical coal and steam coal, a more prevalent type of coal that is used by electric utilities.
If a steelmaker pursued such a target, however, it might want to divest its steam coal operations.
Steam coal and metallurgical coal assets can sometimes be intertwined, which can make separating them a challenge.
For that reason, miners with less steam coal exposure, including Walter Industries, in Florida, or Canada's Fording - which holds a stake in coking coal giant Elk Valley Coal - could also generate attention, along with smaller companies that industry sources say are up for sale.
Spokesmen for Walter, Massey and Fording did not return requests for comment.
FT Syndication Service
Rocketing prices for coking coal and iron ore, the two main components of steel, have left steelmakers shell-shocked. But the price spikes have lit a "For Sale" sign atop the coal mining sector, and a range of assets could change hands this year.
Some of the world's biggest steelmakers, after divesting their coal and iron ore assets over the past decade to adopt so-called pure-play strategies, are now reversing course to gain more control over raw material supplies.
The price increases, triggered by disruptions in some coal supplies and growing steel demand, are also prompting consolidation within the sectors that supply the raw materials.
Accordingly, the entire coking, or metallurgical, coal sector is being combed over for takeover targets, which could include companies with mines in the three main US regions that yield high-quality coal, sources close to the industry say.
"It's fair to say there are a number of North American coal companies up on the block," according to one banker familiar with a range of sale processes.
Thanks to the run-up in coal prices, even companies that produced no cash flow last year could end up selling for several billions of dollars, the banker says.
"Everyone is for sale at a certain price," says Ted Pile, of Alpha Natural Resources, a coal miner in Abingdon, Virginia, which went public in 2005 and has a market capitalisation of $6.5bn.
"Consolidation has to happen within the industry," Mr Pile said.
ArcelorMittal, the world's largest steelmaker, is moving aggressively to boost its self-sufficiency within the market for coking coal.
The company, which meets just one-sixth of its own coal requirement, agreed last month to pay $606m for a 14.9 per cent stake in Macarthur Coal, the Australian coal miner, and might target US companies, industry sources say.
Arcelor's bidding competition could be steep, even though a sharp increase in publicly traded US coal producers' share prices could give some potential acquirers pause.
Apart from the steel producers, mining giant Xstrata has aggressively bought coal assets over the past year.
Rivals Vale and Rio Tinto could circle various assets, and US companies Arch Coal, Peabody Energy and Consol Energy could try to strengthen their market positions.
Potential targets could include companies such as Alpha Natural or fellow Appalachian miner Massey Energy - which are large producers of both metallurgical coal and steam coal, a more prevalent type of coal that is used by electric utilities.
If a steelmaker pursued such a target, however, it might want to divest its steam coal operations.
Steam coal and metallurgical coal assets can sometimes be intertwined, which can make separating them a challenge.
For that reason, miners with less steam coal exposure, including Walter Industries, in Florida, or Canada's Fording - which holds a stake in coking coal giant Elk Valley Coal - could also generate attention, along with smaller companies that industry sources say are up for sale.
Spokesmen for Walter, Massey and Fording did not return requests for comment.