New York - An acceleration in steel prices and a frenzy of merger and acquisition activity over the past two years have combined to push steel mill valuations to unprecedented levels. The question now is, "What's next"?

A panel of securities analysts attempted to answer that question during a session of the 22nd Steel Success Strategies conference this week in New York.

"Values have gone beyond reason," said Dieter Hoeppli of UBS Securities. He said last year's $68 billion of M&A transactions in the global steel industry has continued apace this year, with 12 deals already announced with an estimated aggregate value of $30 billion. Hoeppli said average transaction multiples in the steel sector have climbed from 5.5x EBITDA during 1999-2005 to an average of 8.5x EBITDA since the end of 2005.

In an extreme example of the influence of M&A activity, Hoeppli said Stelco - a small Canadian steel company that twice sought creditor protection and is now widely seen as an acquisition target - now trades at 12x EBITDA.

Robert Miller, a private investment banker, said steel values had climbed steadily when measured as the purchase price per ton of steel capacity. He said Russia's Severstal acquired Rouge Steel in 2004 for the equivalent of $100/st. A year later, Mittal Steel acquired the steel mill assets of ISG for the equivalent of $200/st. During this period, the average selling price of hot-rolled coil was $340/st, said Miller, so the deals were relatively inexpensive.

In the past two years, however, the average acquisition cost has climbed to $500-$600/st, while HRC prices have averaged about $521/st. Hence, it is now more cost-effective to build Greenfield capacity, Miller concluded.

Competition for the few remaining midsize, publicly owned steel companies in North America will continue to drive up valuations, commented James Tumulty of Raymond James & Associates. The upstream and downstream integration of steel companies with mining and distribution business will also drive valuations, said Tumulty, citing the recent consolidation of Steel Dynamics and The Techs, and Cleveland-Cliffs and PinnOak Resources.

Outside of North America and Europe, China looms as the next potential site of industry consolidation leading to higher valuations for steel assets. China is "wide open," said Miller, but there has been only a single foreign acquisition to date: Mittal Steel purchased a minority share in Hunan Valin in September 2005. Since then, ArcelorMittal has attempted to buy a minority shareholding in Laiwu Steel, but has been rebuffed by Chinese government agencies.

China is looking for foreign capital investment in order to gain access to technology, raw material and management skills; however, this may take the form of joint ventures or strategic alliances. Most speakers at the conference agreed that consolidation within China will first occur among local rivals before deals are struck with international steel companies. Lakshmi Mittal, president and CEO of ArcelorMittal, said mergers between Chinese steel companies and foreign steel companies may not happen for 5-10 years.

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