When steel giants are consolidating in both friendly and hostile means, there is no major sign of movements in South East Asia. The steel world is contemplating when Mittal attempted to bid for Arcelor and the South East Asian steelmakers should do the contemplation more seriously. Where will the small South East Asian steelmakers be in the future full of super-giants?
Steelmakers have long realised their vulnerability when dealing with iron miners like CVRD and BHP. They have a similar feeling when working under the strict requirements of the big auto companies. They have a weak bargaining power because they are relatively small. And the South East Asian steelmakers are among the smallest smalls. The industry leaders in the region are Lion of Malaysia, Krakatau Steel of Indonesia, and Sahaviriya of Thailand. The crude steel capacities of Lion and Krakatau are currently around 4 million and 3 million tons respectively while Sahaviiya is a hot rolled sheet producer who is still planning its steelmaking capabilities. The region's weaknesses were highlighted in the last month's article, which include smallness, structurally unbalanced, and dependence on imported materials.
It is almost a consensus that consolidation in steel business is good from a management perspective: companies consolidate in a hope to lower their overall cost structure, more sound capital investment, and ultimately better in serving customers. However, in South East Asia, other factors such as socio-politics may be detrimental to a takeover bid from an overseas company.
The first problem of starting a consolidation process in South East Asia is the "Arcelor Syndrome": a scary thought of being a takeover target. The feeling will be shared beyond the company as politicians and general public become patriotic in defending a local steelmaker from an overseas "predator". This is serious as many steel companies in the region -as others in other parts of the world- were delivered by political decisions. However, as the super-giants emerge, the cost gap –between world-class and domestic steelmakers- may be widened and it will be more expensive to protect small domestic producers. In a few words, for South East Asian steelmakers the pressure from the two facets of globalisation (markets and production) will get very hard to fight.
The second problem is leadership. It is arguable that there is no steelmaker in the region has a solid overall capability to become a leader in a consolidation process. The region needs a real value creator with sound financial, management, and technology capabilities. Will the region open their mind that they may become a part of a global player's portfolio? Or there will be mergers among the region's steelmakers instead of takeovers?