MarketLine Blog

Tata-ThyssenKrupp merger: Deal will have short-term impact but doubts remain over long term

The merger of the European steel making section of Tata and German based ThyssenKrupp will likely have useful short-term impacts upon European production, but the benefits heading into the long-term future are less clear. Soon to be the second largest steel maker in Europe, the combined company will have sufficient bulk to compete much better with Chinese producers who are under pressure from the central government to consolidate. Chances are the new company will gain substantial efficiencies and improve product quality beyond other major rivals, but this only solves some problems and will still result in significant job losses in an industry which has suffered before.

The global market is suffering from two fundamental problems: excessive production and insufficient demand. The latter can to some extent be alleviated by improving products; the former remains a problem caused in part by Chinese dumping on the international market. This reduces the impact the merger can have for both companies involved, especially when possible technological developments within China are taken into account. To cement the competitive gains to be had from the merger, governments need to successfully persuade the Chinese authorities to take sterner action against dumping on the international market.

The impact on the European steel industry the Tata-ThyssenKrupp deal could have is likely to be limited by consolidation which has impacted the industry around the world. For the future of the newly formed company this is a serious problem. With consolidations happening around the world, the danger is that any gains in efficiency or product quality will quickly be matched by other companies involved in mergers. Indeed, the Chinese government has established tough targets for the industry to consolidate, and major mergers are taking place. Establishing the gains the deal will offer over the short-term in the long-term will be difficult to do.

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