Mining - A Return to Veritical Integration

The industrial metal industry is composed of two primary commodity groups - steel and aluminum. Historically, both industries used to be vertically integrated as they would both engage in everything from mining to distribution. Aluminum is still highly integrated, but steel companies sold off their mining and distribution resources in the distant past to reduce their operating leverage. Apparently though, the rise of iron ore and coal prices is leading many steel manufacturers to reverse integrate into mining...

World's Steelmakers Go Prospecting

Industry Plows Profits Into Buying Coal, Ore Mines To Reduce Vulnerability to Rising Commodity Prices

By ROBERT GUY MATTHEWS
June 20, 2008; Page B1

Soaring raw-materials costs are forcing the world's steelmakers to shift strategy. Now, rather than seeking merger partners in their own industry in hopes of gaining market clout, they are trying to protect their access to iron ore and coal by investing in mines.

Steelmakers often owned their own mines in the industry's early days because few other companies had the capital needed to operate them. But in today's climate their goal is to lessen their dependence on big mining companies, whose steep price increases are squeezing steel-making profits. The steel industry's race for minerals, however, pits it directly against those mining giants, who are equally eager to snap up any coal or iron-ore deposits that go on the block.

ArcelorMittal

An open-pit ArcelorMittal iron-ore mine in Canada

A consortium made up of Chinese steelmakers and China's sovereign wealth fund is entering the initial round of bidding for a stake in the iron-ore unit of Brazil's Companhia Siderurgica Nacional SA, people familiar with the situation said Thursday. The group's interest, though preliminary, shows the importance China places on securing supplies of ore and other natural resources amid the current commodities boom.

ArcelorMittal, the world's largest steelmaker, having recently purchased a series of iron-ore mines in Africa, Canada and Russia and coal mines in Kazakhstan, India and South America, now touts itself as the "world's fastest-growing mining group." Last month, it spent $631 million to buy a 14.9% stake in Australia's Macarthur Coal Ltd., the world's largest producer of pulverized coal, a type of coking coal used in steel making, thwarting Swiss miner Xstrata PLC's plans to take over Macarthur.

"Ensuring a reliable source of raw-material supply is more important than ever," Lakshmi Mittal, chief executive of ArcelorMittal, said in an interview. The steelmaker, whose mines supply about 46% of its raw-materials needs, has set aside $5 billion to buy enough of them to provide 70% of its needs by 2012.

Since 2003, the steel industry has been swept up in a wave of consolidation, with steelmakers bulking up to feed the developing world's growing demand for bridges, buildings, power plants and other infrastructure projects. Among other deals, Arcelor SA of Luxembourg merged with Mittal Steel Co. of India and another Indian company, Tata Steel Ltd., merged with Britain's Corus Group. But, now, that wave is decelerating.

Instead, steelmakers are plowing their profits into reducing their vulnerability to spikes in raw-materials prices. In the past year, coal prices have more than doubled, while iron-ore prices have risen about 70%.

"The structure of the steel industry is changing," says Peter Fish, chairman of MEPS International Ltd., a London-based steel research and consulting firm. "It used to be that raw materials accounted for 15% of selling prices. They now account for about 50% of selling prices."

Some analysts say steelmakers are buying at the top of the commodity cycle and overpaying as a result. But with both mining companies and steelmakers vying for the same limited assets, many steelmakers feel they have no choice. Moreover, they say greater self-sufficiency will pay off in the long run.

While China is a huge consumer of steel, it is largely bereft of quality iron-ore deposits, which is why several Chinese steelmakers are moving to secure their own supplies.

CSN, one of Brazil's leading producers of both steel and iron ore, has invited bids for all or part of Nacional Minerios SA, or Namisa, its unlisted iron-ore unit. Major Chinese producers including Baosteel Group Co., Shougang Group and Shagang Group, as well as China Investment Corp., a $200 billion investment pool run by the Chinese government, are interested in the unit, one person familiar with the matter said. But the final composition of the consortium isn't finalized yet, this person said.

CSN has hired Goldman Sachs Group Inc. as its financial adviser for the sale

Last Friday, Sinosteel Corp., a state-owned Chinese steelmaker said it boosted its stake in Australian iron-ore group Midwest Corp. slightly to nearly 44%, further boosting its efforts to take over Midwest.

Other, smaller Chinese steelmakers are also trying to line up more iron ore. Tonghua Steel, the largest steelmaker in northeast China's Jilin province, plans to buy or invest in eight mines near its mills. Company officials say Tonghua can supply only about 20% to 30% of its own iron-ore needs and has to turn to mining companies for the balance. The company hopes to increase its self-sufficiency in ore to more than 50% by the end of 2010. Taiyuan Iron & Steel, a carbon- and stainless-steel producer based in northern China's Shanxi province has said it plans to raise its self-sufficiency to 80% from 50%.

As Chinese steelmakers go on the prowl for resources, Marius Kloppers, chief executive of Australia-based mining giant BHP Billiton Ltd., one of the world's biggest iron-ore producers, said he wouldn't be surprised by a Chinese buy-up of his company's shares.

The race for raw materials is also heating up in other parts of the world. Brazilian steelmaker Usinas Siderurgicas de Minas Gerais SA, or Usiminas, said it will spend $750 million to invest in more mines over the next five years to nearly quintuple its iron-ore production to 29 million metric tons a year. Usiminas already has spent $1 billion this year to buy miner J. Mendes and its subsidiaries. In India, Steel Authority of India Ltd. and Tata Steel signed a deal earlier this year to form a joint-venture coal-mining company.

Write to Robert Guy Matthews at robertguy.matthews@wsj.com¹