Big steel trading companies – a sine qua non no more?

Big steel trading companies – a sine qua non no more?

European media reports covered a statement by MAN Holding Company in Germany apparently, MAN’s Ferrostaal division will either leave or, at the very minimum, change their steel trading activities. At the heart of the matter is the high volume of capital being employed in the financing transactions and the low margins on the sales resulting in an unacceptably low return of capital employed, at least to the shareholders of MAN. Mr. Hakan Samuelson, CEO of MAN Holding, called his Ferrostaal division a “conglomerate within a conglomerate” with a yearly sales volume of 3.2 billion euros ($3.8 billion) and a return on sales of 2.3 percent. MAN’s company wide goal is seven percent by 2007. From the beginning of steel sales, trading companies have played an essential role in the distribution chain. They have the international connections both on the purchasing side as well as on the sales front. In addition, they arrange the necessary logistics and shoulder substantial risks involved in such a convoluted business transaction. Over the years, however, large trading houses primarily located in Europe have evolved, dominating global steel trading business. Furthermore, many of these companies are owned by large European steel mills. Over time economic conditions - as well as information and communication possibilities - have changed this picture dramatically. Steel consumers now know all the potential world suppliers. Many steel giants such as. Mittal Steel have their own sales organizations and sell their steel products themselves without the formerly vital role of a trader. The trader’s role have been increasingly pushed into logistics and financing and therein lies the problem Financing has become a major component of the steel trading business. Many of the former large steel trading houses have either gone away or are now part of a diversified conglomerate with their shares being quoted on stock exchanges all over the world. No stock analyst wants to hear about a sector with as low a return on sales as steel is inherent to steel trading. That is why holding companies such as MAN in Germany are taking a hard look at their steel trading sector. Still, the headlines are a bit misleading. Ferrostaal will likely not drop out of the steel trading business altogether but will instead change its concept. They want to bring together their customers with the steel mills and act as a “sales platform” - otherwise known as an agent. It is also expected that their steel trading activities will be run through their joint venture companies, leaving Ferrostaal with a commission income only. It may be less overall profit but the return on sales for the Ferrostaal unit as well as for the overall MAN Group will go up. Steel trading will not go away and by necessity, it might shift to smaller, more flexible companies . Even as steel manufacturers push ever harder for direct sales to the consumer, traders will still perform an essential albeit more limited role.