Urge to merger: in several parts of the world, steel companies are merging in order to survive. (2003 Ferrous Scrap Supplement).

The consolidation of the steel industry--a combination of bankruptcies, buyouts and mergers that will greatly reduce the number of companies in the steelmaking business--has been talked about for a number of years.

But in the past two years, the talk has turned into action, as steelmakers throughout the world have been combining, sometimes under financial pressure, other times in anticipation of forestalling financial woes.

Significant mergers have already taken place in Europe and Asia, and as 2003 begins, major events within the integrated steel segment in North America have it poised to join the consolidation parade.

RUNNING OUT OF TIME

Most steel industry observers agree that the fragmented nature of the steel industry has ultimately reduced the viability of profitably making steel. Once global steelmaking capacity surpassed demand, companies based in virtually every nation did not want to lie the ones to shut down facilities--and thus miss out on the next surge in demand.

It remains to be seen, but the hope is that with several large companies controlling a significant amount of capacity, these global giants will be better positioned to shut off part of their capacity during times of reduced demand, thus allowing steel supply to better match demand, preventing the free-fall in pricing.

The overcapacity and oversupply situation took its toll on most steelmakers, as company after company in the 1990s and early this decade filed for bankruptcy, but limped along.

Ultimately, some mills did go quiet, and in Europe and East Asia, mergers between larger steelmakers led to facility shutdowns in some cases.

The North American situation is still uncertain, but a handful of companies now seem poised to become the industry's leaders heading into the new century.

On the integrated side, U.S. Steel Corp., Pittsburgh, has announced its intention to buy the smaller National Steel Corp., Mishawaka, Ind.

National Steel, which filed for bankruptcy protection in March 2002, had been majority-owned by Japan's NKK Steel. It is being sold to U.S. Steel for a reported $750 million. It has integrated steelmaking facilities in Ecorse, Mich., Portage City, Ind., and Granite City, Ill., as well as several sales offices and steel-related plants without melting capacity.

The deal should help U.S. Steel remain the largest integrated steelmaker in North America, although its title is being challenged by upstart International Steel Group Inc. (ISG), Cleveland.

ISG was created when New York financier Wilbur Ross spotted an opportunity to buy the assets of the former LTV Corp. from out of bankruptcy and revive them using management methods pioneered by electric arc furnace (EAF) steelmakers. ISG's top management officer, Rodney Mott, is a veteran of Nucor Corp., the highly regarded EAF steelmaker based in Charlotte, N.C.

The new company was successful in purchasing the assets and, more importantly, in negotiating a contract with the United Steelworkers of America (USWA) that provides a labor agreement more typical in EAF mini-mills: the elimination of narrow job descriptions and wages that are based more on incentives and profit sharing and less tied to inflexible retirement benefits.

Ross and ISG did not stop with the LTV facilities--which include integrated mills in Cleveland and East Chicago, Ind., as well as some smaller plants. The company subsequently purchased the EAF plant operated by the former Acme Metals Inc. in Riverdale, Ill.

The purchase ISG is now considering will place it among the top three steelmakers in North America, along with U.S. Steel and Nucor. ISG is reportedly in negotiations with Bethlehem Steel, Bethlehem, Pa., to buy its assets, including integrated mills in Burns Harbor, Ind., and Baltimore, Md., two EAF facilities in Pennsylvania and several non-melting steel-related facilities.

Bethlehem Steel fried for Chapter 11 bankruptcy protection in the fall of 2001 and has since explored several restructuring and merger options. In initial reports concerning the ISG purchase of Bethlehem's assets, USWA president Leo Gerard sounded upbeat that the union and ISG could reach agreements similar to those made at the former LTV plants.

Should these plans move forward, the establishment of two sizable integrated companies could strengthen their ability to compete globally against similarly sized firms that have emerged in Europe after several mergers involving companies based in Europe and Japan.

MAJOR LEAGUE MINI-MILLS

Although EAF mills are still often referred to as mini-mills, the operation of these facilities in North America is increasingly becoming a game for major league players.

The same global steel industry slump that hammered integrated mills took its toll on EAF operators, with several mills entering bankruptcy and a few closing.

The EAF segment in North America can still be considered fragmented, although a handful of companies appear to be emerging as industry leaders.

Leading the pack is Nucor Corp., which has added considerably to its stable of facilities in the past 18 months. Nucor's most notable addition was its 2002 acquisition of mills formerly operated by Birmingham Steel Inc., including EAF shops in Birmingham, Ala.; Seattle; Jackson, Miss.; and Kankakee, Ill., and an idled melt shop in Memphis, Tenn.

Previous Nucor acquisitions allowed the company to add an EAF mill in Auburn, N.Y., and the former Trico facility in Decatur, Ala.

A competitor within the EAF segment that still appears to be strong is Canada's Gerdau subsidiary, formerly known as Co-Steel Inc. An agreement between Co-Steel, Whitby, Ontario, and Brazil's Gerdau SA created a company with a combined 11 mills with annual manufacturing capacity of more than 6.8 million tons per year of finished steel.

Other EAF steelmakers considered financially sound by industry observers include Steel Dynamics Inc., Fort Wayne, Ind., now running its third Indiana mill; North Star Steel, owned by Cargill Inc. of Minneapolis; and the SMI division of Commercial Metals Co., Dallas.

SMI shares a crowded Texas steelmaking market with several competitors, including Chaparral Steel Corp., Midlothian, Texas; Lone Star Steel, Lone Star, Texas; and mills operated in that state by North Star and Nucor. Some scrap industry sources are speculating that the cast of players may soon be reduced by mergers or buyouts.

THE CAPACITY QUESTION

Taking measures to bring world steelmaking capacity in line with demand has been an ongoing topic at a series of global economic forums.

Delegates to the Organization for Economic Cooperation and Development (OECD), which convened most recently in December in Paris, were lobbied by European Union (EU) delegates with a plan to create a fund to encourage plant closures, according to a report in the Financial Times.

At its meetings in February and April 2002, the OECD Steel Committee reviewed statistics of likely pending steel mill closures provided by member nations and agreed to "develop options for the strengthening of disciplines on government interventions and other market distortions in steel, feeding the results, as appropriate, into wider-ranging discussions at the World Trade Organization."

The efforts to reduce global steelmaking capacity are concurrent with the U.S. Section 201 protection measures that have strengthened some previously troubled operators in North and South America.

The potential U.S. steel buyout of National Steel and Cleveland-based International Steel Group's bid to buy plants owned by Bethlehem Steel, along with the Section 201 measures, have bolstered the fortunes of once struggling Western Hemisphere steelmakers.

But the Section 201 tariffs, which have been in place for 11 months, have not halted shipments of foreign steel into the U.S. According to the Financial Times, shipments through October of 2002 ran almost 8 percent above 2001 levels.

Reportedly, U.S. officials will try to persuade Europe, Japan and big developing-country producers to commit to global negotiations aimed at halting steel industry subsidies, which they cite as the reason the Section 201 tariffs were enacted.

Figures for 2002 show that steel from developing countries, Canada and Mexico, which were exempted from Section 201, has been pouring into the U.S. Mexican imported steel tonnage was up 41 percent while Brazil's figure was up 40 percent.

It is unclear how soon or if OECD delegates from the different steel producing nations will be able to reach agreement on key issues affecting global capacity.

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The author is editor 0f Recycling Today and can be contacted via e-mail at [e-mail].