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Trash to treasure: Metals market M&A poised for rebound

You could once set your watch to the cyclicality of dealmaking in North America’s metal and steel industry, with peaks every decade or so.

One wave of consolidation happened in the late 1990s and another just before the 2008 financial crisis. Since then, dealmaking has steadily tapered off amid a consolidated environment, reaching a nadir last year.

North America’s metal and steel executives inked 46 deals worth USD 1.58bn in 2022, the lowest dollar figure in more than two decades, according to Dealogic data.

But sources say sector M&A is overdue for rapid growth as companies secure supply chains and invest in new technology.

Scrap that

A combination of growing industrial activity in the US from onshoring and renewed demand from the automotive and construction sectors is creating new appetite for metal and steel.

Steelmakers are set to add 16 million tons of annual capacity across North America in the next few years as they construct new electric arc furnaces (EAFs), specially designed to process scrap metal rather than the iron ore used in traditional blast furnaces.

Increased demand for scrap is pushing steelmakers to acquire recycling businesses to better control supply and costs.

Dealogic data shows a runup in M&A for scrap yard assets between 2018 and 2021, before a dip last year. Executives expect activity to pick up again in 2023 and beyond.

SA Recycling, backed by Sims Metal Management [ASX:SGM], has acquired scores of scrap recycling businesses in the past. It plans to close a dozen more this year, according to CEO George Adams.

Competition over control of US scrap dealers is pushing some acquirers to look for opportunities abroad.

Canada is the number one destination for US-based metals businesses to find scrap recyclers, according to Dealogic, but an increasing number of acquirers are looking south of the border.

Ricardo De La Pena, CEO of Mexico-based DIMECA, has observed an increase in US companies acquiring Mexico-based metal recyclers as demand for metal increases. Steel Dynamics’ [NASDAQ:STLD] acquisition of Roca Acero SA de CV in October is one example he cites.

Green steel forges ahead

Metal and steelmaking require large amounts of energy to purify metals. This is driving investment into emerging low-carbon steelmaking technologies that use low-heat methods or chemicals to leech out impurities instead of furnaces.

Luxembourg-based steelmaker ArcelorMittal [NYSE:MT] led a USD 120m Series C financing round in January for Boston Metal, a company developing technology that eliminates the need for coal in steel production using an electro-chemical process. The company expects to raise more capital before a possible IPO.

Steel technology company Electra is developing a similar low-carbon steel production method, and raised USD 85m from a consortium of investors in October. The company is considering acquiring targets to bulk up its technology stack.

Although private equity and other financial buyers have made some inroads in the metal and steel sector, industry experts maintain that future M&A will continue to be dominated by strategic acquirers due to the volatility in metal demand.

“[Financial buyers] don't know where the market's going to be [in four to six years], and they don't want to take the risk,” said Vince Pappalardo, managing director of Brown Gibbons Lang at the Fastmarkets' Scrap & Steel North America 2023 conference in January.

While we might not see metal industry M&A crest like in decades past, companies securing supply chains and lowering costs with new technologies are sure to drive it. That seems ironclad.

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