OREANDA-NEWS. April 18, 2011. Metals deal activity is bouncing back strongly and momentum will remain upward in the year ahead, according to ‘Forging Ahead’, PwC’s annual review of M&A activity in the metals sector, reported the press-centre of PwC.

The report highlights:

A threefold increase in international cross-border deals.

A USD14.3bn total by the end of 2010 compared with a low of USD4.4bn in 2009.

PwC anticipates that current and future deal flow will keep these totals on course to move back towards the USPwC anticipates that current and future deal flow will keep these totals on course to move back towards the USD 8bn recorded at the end of the 2006-08 M&A boom.8bn recorded at the end of the 2006-08 M&A boom.

Total metals sector M&A is also moving up strongly – up 79% to US§7bn from ?15.1bn the year before.

The marked increase in international deals is being led by moves to secure raw materials supply – two of the top three metals deals completed in 2010 were for iron ore resources - and to gain a greater presence in fast growth markets.

In a rebuttal of common perceptions of international deal-making, it is the developed market firms rather than Chinese companies that are making the moves. Chinese companies remain largely focused on consolidation of their highly fragmented domestic metals sector.

Africa is also beginning to feature predominantly in the metals deal market, and is expected to play a significant role in the year ahead.

Jim Forbes, global metals leader, PwC, said:
“There is strong momentum in the sector, however, the recovery in developed markets remains inconsistent – strong in some countries but still with the danger that it could be weak or even negative in others. Alongside this, the international imperatives of raw materials acquisition and gaining market share in fast growth countries will drive momentum.”

European metals deal activity recovered slightly in 2010 from the low levels reached in 2009 but total deal value remained very low subdued. There are clear signs of an upturn but it remains inconsistent. EU steel production as a whole increased 24.5% year on year in 2010.

Many companies in central and eastern Europe are still in recovery mode with their ability to conduct significant deals curtailed as they return to profitability but use cashflow to pay down debt. Deal-making for Russian and eastern European targets was largely confined to domestic deals for small or undisclosed sums. In previous years, expansionist moves by Russian companies as well as consolidation inside the Russian metals sector, had buoyed European deal totals.

John Campbell, metals and mining leader, PwC Russia, commented:
“Contrasting conditions in western and developing economies continued to provide the backdrop to metals deals activity in 2010. The result was a two speed dynamic behind deal-making with Asian and Brazilian buyers delivering much of the deal momentum while deal activity by western companies remained subdued.

Russian companies, who had played a prominent role in previous years, largely stayed away from the deal table as they focused on integration and rationalisation of portfolios and lower demand.”

The PwC report also features an exclusive interview with Koushik Chatterjee, Group Chief Financial Officer of Tata Steel. He gives his viewpoint on deal-making in the sector:

“The steel sector certainly has some distance to go in terms of consolidation. Sector consolidation has been slower than the pace at which suppliers or customers of the steel industry have consolidated. Following the global financial crisis, it would certainly be more meaningful to consolidate the sector further to leverage pricing power away from the suppliers to the industry. However, the logic of consolidation may be different depending on each company’s circumstances and it is important to build the strategic rationale for the M&A early to avoid post-integration synergy traps.

“In a capital-starved world, I believe it is not always necessary to undertake full-blown acquisitions. Companies can build partnerships with acceptable equity relationships and yet leverage common priorities on markets, technology and competitiveness. This requires a mature mindset which needs to evolve over time. Collaborating to compete is often a more meaningful use of capital in the long run. After the global financial crisis, chasing control through equity ownership will not always guarantee economic success.”