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Volatile steel pricing eases M&A in 2020

Mar 02, 2020 | 05:01 PM | New York | Muyao Shen

Tags  M&A, steel pricing, hot-rolled coil, election, trade, politics, USMCA, Headwall Partners PwC


The frequency of mergers and acquisitions (M&A) activity in the metals industry often moves with steel prices, and the volatility of pricing in 2020 - partly due to the uncertainty created by trade tensions and politics - is likely to keep M&A activity flat to reduced, according to industry experts.

A total number of 12 M&A transactions, valued at $7.5 billion, took place in 2019, down from 17 M&A's in 2018, which was valued at approximately $2.8 billion, according to data from Headwall Partners LLC.

Hot-rolled coil prices averaged $30.03 per hundredweight ($600.6 per short ton) in 2019, down from the average of $41.37 per cwt ($827.4 per ton) in 2018, according to Fastmarkets’ pricing records.

“The steel M&A market tends to be correlated with steel pricing,” Peter Scott, managing partner at Headwall Partners LLC, said during an interview with Fastmarkets. “And typically at higher points in the cycle [of] getting higher pricing levels and higher volume, there tends to be more significant M&A activity. And then as volume and pricing declines, there tends to be less activity.” 

This is because companies often seek growth more aggressively during a time when they have benefited from a more robust financial performance, he added.

From a financial investor’s perspective, the volatility in steel pricing has lowered the steel sector's appetite for potential investment opportunities. In 2020, factors that could continue to contribute to volatility include tariffs, trade disputes between China and the US and the upcoming presidential election, Scott and Michael Tomera, PwC’s metals leader, said.

“[Elections] have a meaningful impact on the economy or on the steel market, and there’s uncertainty around the [Presidential] election,” Scott said, citing a survey his company recently conducted with executives and leaders from steel and metals companies in the US.

Most of the survey participants believed that Donald Trump, whose administration has been creating a favorable environment for the metals sector, will be re-election in 2020. They also expressed worries that a Democratic win in the election would hurt the metals sector.

Approximately 73% of surveyed participants said they think a Bernie Sanders or Elizabeth Warren presidency will have a "strongly negatively" long-term impact on their company’s financial performance compared to a Trump re-election.

“If there was uncertainty around the outcome of the election, with a very strongly negative view of Sanders or Warren… companies might be less willing to pursue growth through acquisitions,” Scott said.

“I think people may be holding their breath until they see the outcome [of the election],” Tomera said.

Additionally, US steel mills could record another quarterly earnings miss, like they did in the fourth quarter of 2019, amid lower steel prices, according to a research note by UBS equities analyst Andreas Bokkenheuser dated Monday March 2.

Bokkenheuser added that the impact created by the wide-spread novel coronavirus (2019-nCoV) is one of the negative factors hurting steel intensive sectors including construction, energy and automotive.

Fastmarkets’ daily steel hot-rolled coil index, fob mill US ended Friday, February 28 at $29.37 per hundredweight ($587.4 per short ton), down 0.3% from $29.47 per cwt a day before, but up 2.3% from $28.70 per cwt a week ago.

On the other hand, the latest progress made on the United States-Mexico-Canada agreement (USMCA), and the fact that roughly $2 trillion in cash is currently sitting in the private equity market, could generate new interest in the metals industry from the financial world.

USMCA was signed into law by President Trump in late January, clearing its final hurdle within the US, after it had been passed through the Mexican Senate.

It will still need to be ratified by the Canadian Parliament.

“I think [the USMCA signing is] a significant development that hopefully will cross off one of the uncertainties with respect to the metals and the US economy, and hopefully will pave the way for better prospects in the metals industry,” Tomera said.

At the same time, with “the tremendous amount” of cash in the private equity market, Tomera believes that the money will be poured into the metals industry at some point.

“New [financial] players have to come in and with the amount of money in private equity. It would be attractive,” Tomera said.


 

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