Appetite for metals sector acquisitions to remain muted amid excess capacity purge

‘One belt, one road’ construction projects could boost demand

PUBLISHED : Sunday, 28 February, 2016, 6:42pm
UPDATED : Monday, 29 February, 2016, 1:26pm

Mergers and acquisitions in the global metals sector are expected to remain quiet this year after plummeting last year, industry observers say, with deals involving Chinese firms held back by slow and painful industry consolidation as excess capacity is squeezed out.

According to a PwC report on global metals sector mergers and acquisitions, total deal value fell 32 per cent year on year in 2015 to US$11.4 billion, the lowest in 13 years.

“We don’t anticipate any significant revival in 2016 ... significant hurdles remain in the way of a broader pick-up in deal-making,” it said.

China, the world’s largest consumer of copper, aluminium and steel, was particularly active in overseas acquisitions of upstream metals mining assets between 2008 and 2014 but has since seen a marked slowdown in deal flows.

Its overseas metals mining acquisitions plummeted 49.4 per cent year on year to US$4.67 billion last year, the lowest level in eight years, according to financial markets data provider Dealogic.

Deals in outbound downstream metals processing and production dived 80 per cent to US$383 million last year – the lowest in three years.

A key factor that would drive an uptick in acquisitions in China’s steel industry is a recovery in demand both in China and in overseas markets
Ken Su, PwC

Ken Su, PwC China mining and metals leader, said a possible reason for the low level of acquisition activities was the current state of the metals sector.

Challenges such as overcapacity, production costs and environmental compliance issues meant it would take time before a broader industry profitability turnaround could be expected, leading to a more favourable environment for increased acquisition activity.

“A key factor that would drive an uptick in acquisitions in China’s steel industry is a recovery in demand both in China and in overseas markets where China is seeking to win construction projects as part of Beijing’s ‘one belt, one road’ initiative,” Su said.

Lisa Li, a partner at KPMG China, said a number of attempted overseas investments were observed last year, particularly for gold, copper and iron ore, which indicated that some Chinese mining firms were getting ready to invest for future growth through acquisitions.

“Despite this recent trend, local transactions will still dominate, at least in the first half of this year as outbound transactions require a longer decision process and more careful assessment,” she said.

Li Hongmei, senior editor for metals and steel at commodities industry information provider Platts, said most Chinese steel and aluminium smelters were loss-making and would-be acquirers needed strategic reasons for an acquisition, such as the addition of a new market. That was the case in privately owned Jianlong Iron and Steel’s interest in buying near-bankrupt Shanxi Haixin Iron and Steel, also privately owned, to gain access to the Shanxi market last year.

“This is especially so for firms that need to borrow money from banks, and for listed companies that will need approval from shareholders for major acquisitions,” she said. “The consolidators tend to demand only taking care of a certain proportion of the debt of the firm to be acquired, while leaving the rest to be settled by the local authorities either alone or via negotiations with banks involved.”

State-owned firms dominated the metals sector, and the central government might use the industry downturn as an opportunity to order or push companies to consolidate into bigger players to better weather the downturn. One example was last year’s merger of China Minmetals and China Metallurgical Group, which would not normally want to merge when the industry was booming.

But such state-ordered mergers sometimes took a long time to integrate their operations and reap cost savings and efficiency gains, Li said, citing the example of Hebei Iron and Steel Group, formed in 2008 via the combination of six steel mills including Tangshan Iron & Steel and Handan Iron & Steel. Even though it’s considered a successful case in China’s steel industry, it still has its iron ore procurement done by multiple teams.

In the case of central government-backed Anshan Iron and Steel Group and Benxi Iron and Steel Group – owned by the city government in Benxi, Liaoning province – their merger a decade ago existed in name only, she added.