OREANDA-NEWS. April 20, 2009. After forging ahead in previous years, metals industry deal-making fell away sharply in 2008 as world demand fell and prices plummeted according to ‘Metals Deals 2008’, PwC’s annual review of the metals industry, reported the press-centre of PricewaterhouseCoopers.

Average deal value in the first half of 2008 was US301 million compared to US318 million in first half of 2007. In the second half of the year, average deal value plummeted to US125 million and total deal value fell from a high of US51.1bn in Q3 2007 to a tenth of this level a year later.

Wilfried Pototschnig, deputy head M&A Lead Advisory, PricewaterhouseCoopers in Russia, said:

“The year in metals M&A deal–making saw a dramatic and sudden about-turn. Optimism that China would continue to compensate for downturns elsewhere was replaced by increasing concern about a weakening in global demand, including China. A steep rise in commodity prices in the first half of the year was followed by a deep slump.”

The deal–making focus moved away from the mega-deals that had grabbed the headlines in earlier years.The big deals worth over US10bn plus were nowhere to be seen despite dominating metals deal activity in 2006 and 2007. However, in the absence of such mega–deals, underlying deal value was actually higher than it had been in preceding years. This led to total deal value plunging from the record US144.7bn in 2007 to US60.6bn in 2008. Indeed, the strength of activity that took place in much of 2008, before the rapid turnaround in world markets, is reflected in the fact that there were 29 US1bn plus deals in 2008 compared to 20 such deals in 2007.

Russia
In 2008 Russian companies played a central role in world M&A activity. The largest North American deal was Russian steelmaker Evraz’s US4bn purchase of the North American tubular operations arm of IPSCO from Swedish steel producer SSAB. The deal gave the Russian company an important pipeline production presence in the US and Canada. It was one of two purchases by Evraz, highlighting the continuing importance of Russian acquirers, following 2007’s US30bn merger between Russian aluminium producers RUSAL and SUAL and Swiss commodities trader Glencore.

Back in 2007, Evraz had been reported to be interested in a deal for the whole of IPSCO only for the target to be bought by SSAB in a US7.6bn transaction. Evraz sold on US1.7bn of the acquired IPSCO assets to TMK, Russia’s largest manufacturer and exporter of steel pipes. The IPSCO deal was concluded at a time when surging oil and gas demand was pushing up pipeline demand. Even with a subsequent waning of energy demand, concerns about energy security coupled with new stimulus measures will continue to spur the renewal and extension of energy networks and other infrastructure in North America, leaving Evraz and TMK well positioned.

Russia’s biggest steelmaker, Moscow–based OAO Severstal, was also a key player. In May 2008, Severstal completed an acquisition of Sparrows Point, a fully integrated steel mill in Baltimore Md., from ArcelorMittal. In June 2008, it entered into an agreement to acquire Esmark Inc., a manufacturer and distributor of flat-rolled and other steel products.

In July 2008, it completed its acquisition of WCI Steel, a market leader in the production of value–added steel products. Combined with its 2004 purchase of Rouge Industries, Severstal is now the fourth-largest steelmaker in the US. However, in common with other leading steelmakers, the severity of the downturn saw it ending the year with major production cuts and cancelled capital investment.

In 2008 Russian miner and steelmaker Mechel took over Oriel Resources in a US1.5bn deal. Oriel operated a ferrochrome smelter in Russia and had developed chromite and nickel mines in Kazakhstan. The purchase enabled Mechel to expand its ferroalloy business as well as use its existing coal production for Oriel’s smelting operations. Mechel is Russia’s largest producer of stainless steel, the primary end use for chrome products, and had entered the ferroalloy market with its purchase of ferrosilicon producer Bratsk Ferroalloy Plant in Siberia in 2007.

The largest deal was the completion of a US2.2bn acquisition by Russia’s Evraz Group of various Ukrainian assets - the Sukhaya Balka iron ore mining and processing complex; the Dnepropetrovsk iron and steel works with a total annual capacity of 1.8 million tonnes of pig iron and 1.23 million tonnes of crude steel; and three coking plants with a total annual capacity of 3.52 million tones of metallurgical coke. The deal enabled Evraz to increase its iron ore self-sufficiency and ensure further upstream integration. It also created captive coke-making demand for the excess production of the company’s coal mines in Siberia.

John Campbell, metals and mining leader, PricewaterhouseCoopers in Russia, commented:
“Consolidation has left the larger metals players in the industry in a more flexible position to shut down production and manage capacity across the globe. The pressure to restructure will intensify the longer the downturn continues and the outlook for demand is uncertain.”

North America
Much of North American deal activity was driven by foreign acquirers, notably Russian companies. North America metal M&A activity fell sharply with the number of steel and aluminium deals being halved and the total value of deals dropped steeply from US76.7bn in 2007 to US15.8bn in 2008. Three quarters (76%) of North American metals deal value came from cross-border transactions, 83% of it for steel targets. In the first half of the year, such interest was buoyed by a weak dollar.

South America
Similar record increases were recorded in South America, spurred by a flurry of deals for Brazilian iron ore assets. Although only accounting for 8% of all deals, they contributed to 24% of worldwide metals deal value. Total deal value in the region reached US14.8bn up 54% on 2007’s US9.7bn.

Western Europe
Deal activity slowed considerably in Western Europe with deal numbers down from 104 in 2007 to 65 in 2008 with the deal list headed by three US1bn plus deals. The largest was the completion of the US3.7bn all-Austrian merger of steelmaker Buhler–Uddeholm and Voestalpine, Austria’s biggest steel group. The other two both featured London-listed targets with production and mining assets in Russia and Kazakhstan. A London–listed company with Kazakh assets was also the focus of the third US1bn plus deal in the 2008 western European metals deal list.

Eastern Europe
Like the western European trend, a big headline fall in deal value in eastern Europe and Russia, due to a single 2007 mega deal, disguised an underlying rise in metals deal value between 2007 and 2008. RUSAL’s three-way merger with SUAL and Glencore had boosted the 2007 total by US30bn from an underlying US0.8bn. Total 2008 deal value was US3.7bn, more than four times the underlying 2007 value. Deal numbers in the region rose from 23 to 32.

Asia Pacific
Asia Pacific deals reached record highs with total value more than doubling to US16.4bn in 2008 from US7.2bn in 2007.