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ArcelorMittal: when bigger is better

ArcelorMittal: when bigger is better
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First Published: Fri, Aug 01 2008. 12 19 AM IST

Updated: Fri, Aug 01 2008. 12 19 AM IST
Roar! The giants of the metals and mining world get bigger and more pumped up with every quarter. ArcelorMittal notched up an astonishing $8 billion (Rs34,000 crore today) of earnings before interest, taxes, depreciation and amortization (Ebitda) in its second quarter, easily beating its $6.5 billion target. The steel maker can’t claim credit for all the global trends buoying its profits. But even without the tailwinds, ArcelorMittal’s success is an advertisement for sheer scale.
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Being the big cat of the steel sector, with one-tenth of global output, gives ArcelorMittal three advantages over smaller rivals such as ThyssenKrupp AG, Evraz Group SA and Corus. One is its bigger balance sheet. ArcelorMittal is buying up its own supplies of iron ore and coking coal, two of the most rapidly inflating commodities.
Deeper pockets means less competition for assets. ArcelorMittal can also sink capital into new projects, where returns may not be visible for years, while still drip-feeding cash back to investors—$1.1 billion of it in the last quarter.
Another advantage is reach. With global inventories low, and production trailing demand, metals buyers are in a kind of worldwide auction royale. Soft demand in one region can be replaced by appetite elsewhere. So, while demand in the EU is expected to grow just 1.6% this year, demand in China—a market twice the size—is increasing seven times as quickly. That favours metals players with the biggest networks, such as ArcelorMittal and Swiss firm Glencore International AG.
The third advantage is market clout. ArcelorMittal hit its $1.5 billion operational synergy target from its two-year-old union last quarter, but is still squeezing out the more subtle benefits of the merger, such as the increased purchasing power and the ability to push up prices to pass on costs. Those saw ArcelorMittal’s Ebitda margins increase from 17% to 21% in the quarter.
This won’t have escaped other merger-minded metals giants such as BHP Billiton—the Anglo-Australian iron ore miner locked in a $150 billion bid for rival Rio Tinto. The mega cap metals groups are naturally shy about advertising the advantages of clout. That is because customers—and governments—don’t like the idea that a bigger company can throw its weight around. The larger they get, the more reason the big cats have to prowl quietly.
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First Published: Fri, Aug 01 2008. 12 19 AM IST
More Topics: ArcelorMittal | Steel | Mining | Ebidta | Thyssen Krupp |