Carmakers and other big steel consumers need not worry just yet that consolidation among steel producers will drive prices of the metal sharply higher at a time when slack sales are keeping intense pressure on margins.
Even after last week's Mittal Steel and Arcelor merger agreement, much more tie-up activity would have to ensue before steel prices escape their traditional boom-or-bust cycle, even though price volatility is already becoming more muted.
The fit between the two companies is so good that they hardly compete with each other around the world.
While Arcelor is a major supplier of sheet steel to carmakers in western Europe, for instance, Mittal is not in the market.
Despite the price surge in 2004 that accompanied fears of shortages amid growing demand from emerging economies in China, India and elsewhere, the steel industry remains fragmented and has traditionally been prone to huge price swings.
Led by Mittal and Arcelor - companies built up by consolidation in the sector so far - producers have shown of late that they have the discipline to cut output when demand is weak and thus help defend prices from collapse.
But the industry is still fragmented compared with its suppliers and its customers.
The top five steelmakers have only around 20 percent of the steel market.
In contrast, the top five carmakers have some three quarters of the market and only three companies control almost all of the iron ore that is a crucial steel ingredient.
Overall then, there is a positive gloss on mergers in the steel sector.
"One of the things that strong steel companies can provide is research and development," said one car industry official who asked not to be identified.
"Financially stable suppliers can do (R&D) better than those that aren't healthy, and there were are lot of unhealthy steel companies," he added.
This expertise can in turn help carmakers build autos that blend various grades of metal so that they are safe, light and supple enough to meet pedestrian-safety rules.
WestLB analyst Michael Tappeiner noted that a combined Areclor-Mittal is the biggest steel producer by far but still have only ten per cent of the market. Nevertheless, carmakers might still be wary of its potential pricing muscle.
"I think that is a worry for the car industry and I think that in the short term you could see smaller players like Salzgitter benefit from that," he said.
He recalled that when Arcelor was created some carmakers were nervous about being too dependent on one player and gave more work to the niche German company.
Carmakers tend to use long-term supply contracts to smooth out steel-price swings, and the last thing they need now are higher steel prices because of generally dearer raw material prices and slack sales in saturated major markets.
European volume auto-makers' profitability seems to be converging at a very modest level of about two to three percent operating margin, ratings agency Standard & Poor's said.
"Overall, we expect to continue to see these modest levels of profitability in the future, as the underlying fundamentals causing them are likely to persist: high competitive pressure, high raw-material costs, largely unfavorable foreign exchange rates for the export-oriented (manufacturers), and the ongoing need to invest in low-cost countries and in efficiency-improving measures," S&P analyst Maria Bissinger said.
The DJ European car sector index has barely outperformed the broader market this year after auto stocks were sold off heavily in the recent market retreat on fears an economic slowdown would hit consumer demand.
The index is up around two percent this year.
Last week, the UK's richest man hailed a "seminal event" for the steel industry after his firm Mittal Steel agreed a takeover with rival Arcelor worth around £18 billion.
Lakshmi Mittal won the backing of the Arcelor board after a five-month battle to merge the world's two largest steel companies and create a powerhouse capable of producing 120 million tonnes of steel a year.
The deal was struck after Rotterdam-based Mittal sweetened its offer to 40.4 euros (£28) a share - up seven per cent from its earlier offer and 49 per cent higher than the initial hostile approach in January. ..SUPL:
