Matt Chambers From: The Australian February 05, 2011 12:00AM
THE proposed merger between Japanese steelmakers Nippon and Sumitomo has led analysts to suggest a tie-up between Australia's two listed steel companies -- BlueScope and OneSteel -- could be a good idea.
The two companies -- which were both spun off from BHP's steel business -- are facing tough times as iron ore and coking coal prices skyrocket, China produces cheaper steel and competing imports are bolstered by the strong dollar.
Analysts say it makes sense for BlueScope and OneSteel to combine their operations.
"They should merge," said one analyst at a major investment bank, who covers both stocks.
"They have enough iron ore through OneSteel to satisfy their needs." One option would be to shut down the Whyalla steelworks in South Australia -- which OneSteel chief Geoff Plummer says is threatened by Julia Gillard's mining and carbon taxes -- and convert part of BlueScope's Port Kembla plant to make the long steel products the domestic building industry gets from OneSteel. "That way they could focus almost entirely on the domestic market," he said.
An analyst at another major investment bank also said the pair would make a good combination and would benefit from a merger.
"Scale is everything in terms of efficiency," he said.
At Port Kembla, BlueScope makes flat steel products used in manufacturing of products such as car and train exteriors, Colorbond roofing and whitegoods. It mainly sells to export markets but has vowed to focus more on domestic production.
OneSteel has converted Whyalla to use magnetite iron ore so it can export the more valuable hematite ore that it used to run its plant on, meaning it has not been as exposed to raw material price rises as much as BlueScope.
The two companies have similar market values, with BlueScope worth about $4 billion and OneSteel $3.6bn.
The proposed Japanese merger, which would create the biggest global steelmaker after ArcelorMittal, has been driven by similar factors.
Steelmakers have been hedging against increased iron ore and coking prices by taking big stakes in mines and deposits.
"What we're seeing now is a resumption of consolidation in the steel sector," RBS analyst Todd Scott said. "China has been accelerating the pace of its consolidation, and its seems Japan and others could now be trying to bulk up in an effort to compete."
While traditional steelmakers are looking at consolidation, they are also increasing production in cheaper regions closer to iron ore supply.
South Korean steel giant Posco, now the world's third-biggest steelmaker, this week got government approval to build a 12 million tonnes-a-year steel plant in India's Orissa state.
It also has plans to set up a 6 million tonnes-a-year plant in Karnataka in India.
China's Baosteel is the world's second-biggest steelmaker.
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