03 Aug Metals Industry Update – Q2 2018
The current metals M&A environment has benefitted from strong economic tailwinds as original equipment manufacturers around the world demand more raw material inputs to satisfy increased growth. We expect M&A activity to remain at a robust pace through 2018 driven by a healthy economy, lower corporate taxes, strong corporate balance sheets with ample levels of liquidity and access to capital available through both debt and equity markets. Strategic buyers continued to account for the bulk of deal activity in the metals sector during the first half of 2018. Given that higher interest rates will increasingly make debt financing more expensive for financial sponsors, we expect that strategic buyers, which can access existing cash balances and are less inclined to use debt financing, will continue to maintain a competitive edge when competing for deal opportunities through the remainder of the year.
As overcapacity remains a concern in this sector, particularly for steel producers, industry participants continue to pursue product extensions which will allow them to move up the value chain. The need for lightweight, corrosion-resistant solutions for use in the automotive, energy, and construction sectors is creating ample opportunities for producers looking to invest in innovative technologies. As a result, we expect companies with strong technological underpinnings or value-added product offerings to become increasingly attractive as acquisition candidates.
The volatile policy environment and its impact on M&A activity in the metals sector is still to play out. President Trump’s announcement that the U.S. will withdraw from the Iran Nuclear Deal primarily impacts the energy sector; however, higher oil prices may lead to broad raw material cost increases, and as a result, have the potential to dampen the global economic momentum presently benefitting the metals market. Conversely, industry players may look to rebuild their supply chains within the U.S. in the event the administration issues a NAFTA termination letter. Tariffs on steel and aluminum are certainly signs of increasing political tension; and although the ultimate economic impact remains unknown, foreign companies looking to compete in U.S. markets may look for domestic acquisition targets in order to lessen the negative consequences inherent in a higher tariff environment.
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