Enter the giant: ArcelorMittal (MT) is reportedly gearing up to make an acquisition offer for beleaguered coal miner Massey Energy (MEE). Grabbing all that coal could help MT control its steel costs.
MT is the 900-pound gorilla of the steel industry, but has been plagued by rising input costs -- iron ore and coal -- and a relative lack of direct access to those commodities.
In fact, the company has suffered in some markets as previously favorable supply agreements expire, forcing its subsidiaries in South Africa (for example) to suddenly pay market price for raw materials.
However, disappointing demand from the construction sector has left MT and other steel makers unable to pass on these rising costs to their customers; if anything, steel prices are dropping as the industry tries to book revenue by offering discounts.
MT, for example, announced only today that weak European steel markets were forcing it to shut down three mills geared toward Eastern Europe.
Now, in an apparent effort to improve the situation on the cost side, MT is reportedly looking to buy troubled U.S. coal miner MEE.
MEE has had difficulties of its own, ranging from mining disasters to an inability to generate significant profits in recent quarters. As a result, it has been courted by local rivals like Alpha Natural Resources (ANR) and Arch Coal (ACI) -- although either of these would have a hard time swallowing comparably-sized MEE in a traditional acquisition -- and gigantic and newly public Coal India.
With a market cap of $51 billion to MEE's $5 billion, MT would be easily able to absorb any of the three U.S. coal companies currently in play -- and in fact could probably grab all three of them without alienating shareholders hungry for a way to protect their investment and its margins.
In any event, Russian integrated steel maker Mechel (MTL), which already owns its own coal reserves, looks better and better. The stock is down today, but as the war for high-grade coal heats up, the best may only be ahead:
Disclosure: No positions
