Ariba expects to see a new round of mergers and acquisitions in the upcoming months, since the economic value of many global suppliers are diminished due to the current decline in financial markets. Many global steel mills and non-ferrous suppliers still have excess profits that were stemming from sustained high prices over the first half of 2008. Additionally, any monies that were previously budgeted toward internal capacity expansion may be available as raw metal suppliers avoid building internal capacity during a period of suppressed demand. The merger and acquisition activities are expected to include competitive, upstream, and downstream companies.

One growing trend among metal buying companies working with Ariba is for buyers to attempt to consolidate their supply base. Buyers are attempting to reduce the costs associated with maintaining costly quality approvals as well as the risk of being impacted by suppliers facing poor economic performances in a downward economy.

Production and consumption figures coming out of China are somewhat mixed, as much publicity is being given to China’s slowdown, even though statistics still show China is expanding rapidly. Recently published GDP statistics show that China’s GDP growth in the second quarter “fell” to 10.1 percent, compared to their annual GDP growth of 11.7 percent in 2007. The GDP for all of 2008 is expected to remain close to 10 percent according to the Development Research Centre (a leading Beijing policy-making organization). This group also projects a GDP growth of nine percent per year over the next decade. Additionally, the Chinese government recently cut interest rates in September down to 7.2 percent, which is the first drop in more than six years. Despite the talk about a cooling Chinese economy, the growth potential in China is still staggering. McKinsey and Company recently made the prediction that as China industrializes in the next 20 years, it will build as many as 50,000 skyscrapers—a number roughly equivalent to 10 New York Cities. Additionally, BHP Billiton recently made the prediction that China will consume as much steel over the next 10 years as the U.S. consumed for the entire 20th century. Whether or not these statistics fully materialize, it is certain that China’s growth will continue to dominate the global manufacturing outlook for many years to come.

Industry Grapevine
The Precision Metalforming Association (PMA), a group of metalforming companies in the U.S. and Canada, recently published the results of a survey of member companies that emphasizes the deteriorating market conditions for metalforming companies.

• 54 percent of companies surveyed project a decrease in incoming orders for October, compared to 25 percent of respondents in October 2007.
• 67 percent expect general economic activity to decline during the next three months, compared to 23 percent that felt this way in October 2007.
• 30 percent of U.S. metalforming companies have at least a portion of their workforce on part-time or layoff status, which is the highest level since November 2002.
• 30 percent of respondents said their customers were paying them less promptly compared to 17 percent in October 2007.

Ariba’s take: The PMA survey serves to quantify the general sentiment of metalforming companies in the current market. The supply base is already feeling the effects of a down economy, and further declines are expected by the end of the year. While rising raw materials were a major concern for suppliers in 2007, the reduced demand and negative outlook on incoming business in the coming months is an even larger concern for suppliers.

Global steel prices are dropping fast and starting to approach the magical $650-per-ton mark, which is the estimated cost of producing one ton of steel, according to steel industry consultants World Steel Dynamics. Despite the sharp drop in steel prices and profits for mills, global raw steel production is expected to increase more than five percent during the next 12 months.

Ariba’s take: Declining prices that approach the actual cost to produce steel will quickly “weed-out” the global mills that are uncompetitive in terms of operating and management costs. The strong global mills will be able to feed off of the sustained period of high profits earlier in 2008, while the mills that did not do a great job in cutting costs during this period of prosperity will begin to post poor financial performances. Look for weaker mills to become merger and acquisition targets in the upcoming quarters as healthier mills take advantage of reduced prices for these poor-performing companies.

U.S. Focus

by Nicoleta Diaconu