In 1998, the new giant Arbed accounted for a production of 20.3 million tonnes of steel as the world's fifth largest producer. They had almost taken over Salzgitter also, another five-million- tonne German producer in their march. Similarly, Usinor became larger acquiring Cockerill Sambre of Belgium and CST of Brazil. Following a series of similar actions, Thyssen-Krupp Stahl now controls 14.8 million tonnes of steel.

Ispat international of LN Mittal has not really shown where it is going to stop. Everyday one only reads either about his latest acquisition or the one in the pipeline. In the USA also, mergers of relatively smaller firms have taken place. Many, although they have not merged, have formed strategic alliances to consolidate and strengthen their businesses.

There are many more such cases. Point is not to have an exhaustive list here - but to have a clear understanding why such consolidation is taking place the world over in steel business. One of the easily found and well accepted arguments is that mergers, acquisitions and strategic alliances are required, especially now, to save the industry from the ruinous effects of global competition caused by widespread excess capacity.

Competition is higher when the industry is fragmented. A monopoly or an oligopoly in the market restricts competition and allows for better profits. Unlike say, in the automobile industry, the steel industry globally is much less concentrated. In the automobile industry, about 19 companies accounted for nearly 98 per cent of the global car production.

This itself is being considered now as excessively fragmented and the industry is looking for further concentration! As against this, in the steel industry, the top 10 companies, even after the latest mergers account for only 23.5 per cent of the global crude steel production. The level of concentration, however, is higher in case of specific market segments. Only in the ordinary carbon steel segments the top 10 companies do not show any significant market share. The automotive industry's structure is being cited even by British Steel as an example of an ideal position.

The steel industry is really going for a change. In the past, European and Japanese cartels used to determine the global steel price line. With the emergence of many developing countries as major steel producers the cartel has broken. This was overtaken by cutthroat competition.

The situation worsened further with the emergence of the CIS countries as major sources of steel at low prices. The crisis in Asia along with its impact on the rest of the world led to the unprecedented crisis in the global steel market. The world dollar-denominated prices dropped by as much as 40 per cent in the course of a year. Therefore, for quite some time, this idea was doing rounds in steel business that one way, and perhaps the only effective way, steel companies can overcome the impact of fierce competition is by eliminating competition itself. But, competition cannot be eliminated.

It can be reduced. Therefore, to remain competitive one has to reduce costs of production. Mergers and acquisitions and other strategic alliances help reduce costs. Therefore, companies thus merging hope to gain from both cost reduction and better prices from reduced competition. Formation of global giants is also being necessitated by the demands of a globalised market.

The companies which have the capability to produce high quality steel for greater value to the customers and have their reputation in tact in the market now find their continued presence in the ordinary grade steel market is not in their long-term interest. If this is going to be the future of steel, then mergers, acquisitions and strategic alliances make sense as these will reduce research and development costs and then provide larger economies of scale for customised products. There is a difference between LN Mittal's style of acquisition and that of other majors mentioned earlier.

Mittal took over sick companies that had failed to run. He made them run. Mittals have not acquired companies to reduce or eliminate competition. He has taken over companies with diverse businesses and in different parts of the world having absolutely no relation with each other. As against this, the mergers related to British Steel, Usinor, Arbed, Thyssen etc, involve large operations, not necessarily making losses.Strategic considerations were more important than attractive acquisitions in the case of Mittal takeovers.

There are a few questions which perhaps will come to anyone's mind. One is, whether formation of global giants in this manner is going to be a more common observation in the days to come. The current trends indicate so. There are many talks at the moment being reported of possible mergers and acquisitions of large enterprises. Even POSCO and Nippon Steel are planning to have a equity swap. CSN of Brazil is being eyed by many including Thyssen-Krupp.

Two, whether such mergers and acquisitions are going to effectively reduce steel industry's capacity worldwide. As present, no such trend has emerged, but, logically that should happen. Three, are these only the last resorts of large companies for survival in a competitive industry that is likely to go for a huge shakeout. Possibly so. In competition smaller companies tend to fall apart faster. The last and not the least, is the question if such developments will have profound impact on the world prices due to return of oligopolies. Certainly so. With competition reduced, the biggies will form cartels and rule the market. But, immediately, there will not be any major impact on the commodity steel market. The impact may at best be limited to the specialised steel market for now.