Mr. Bull:
Finally, we are seeing a consistently stable and profitable steel market. The past three years have been very solid, and at times, even great. Prior to 2004, steel prices lingered at unacceptable low levels that did not in any way reflect the cost factor. Because of increased demands in developing countries and subsequent steep increases in
scrap and
iron ore, steel prices in general have reached a new plateau, and despite recent market fluctuations, this new pricing level seems to be firmly established. Another factor for this vast improvement is the consolidation phase that has begun in earnest. True to today's global market, the consolidation movement knows no borders, at least as far as the major industrialized countries are concerned. The US is no exception. The latest chapter was the merger between Evraz in
Russia and Oregon Steel in Portland, Oregon.
The benefits are clear. We will no longer see ruinous price decreases in a falling market; instead, capacities will be more easily curtailed, keeping prices relatively stable. In fact, this is the prime concept of Mittal Steel, which through high profile mergers and acquisitions, has now become the world's largest steel maker.
And the market still works. There are a lot of players around, and we see competitive pricing right now as the
US steel market is going through a weaker phase. Contrary to the past experiences, though, prices do not continue to fall endlessly, and being in the steel industry has by and large become a profitable proposition. We are all better off for it, and the overall strong US economy with high corporate profits in the last few years is the best testimony.
Mr. Gloom:
The consolidation is, in general, good for the industry. However, consolidation alone cannot explain the last three good years. As you can remember, 2004 was the banner year that prices doubled, big profits were made, and for the most part, remained at a higher level – these things all happened far before the mill merger mania started.
What changed our markets fundamentally was the extraordinary demand coming from South East Asia, led by
China. Prior to that, steel was such a dog industry, and hardly any
investments were going to new plant
construction, except of course in
China.
So the strength that strong demand gave the market can be taken back almost as quickly. Supplies have seen a lot of capacity increases in the last two years. Also, high prices and good profits cannot last if demand goes south, which could happen as a result of another highly probable South East Asian financial crises. This locomotive called
China may run out of steam one day, and then what?
Mr. Bull:
I agree that the consolidation of the steel industry was not the catalyst for the steel boom. But as the demand for steel gets a bit weaker in the US, the restructuring of the industry will help prevent the catastrophic pricing we saw prior to 2004.
China is an interesting subject. Because of their rapid expansion, the Chinese steel industry faces overcapacity, with too many old, inefficient, air-polluting, state-owned mills. The restructuring we have seen in
Europe and the Americas has yet to evolve in
China. Whenever their trade advantages (currency, export rebates) are gone or have been scaled back, Chinese mills might find it harder to compete with truly global steel makers and their very cost-efficient steel mills.
Just consider these numbers (from the Cato Institute). In 2000, 27 US producers of flat rolled steel operated 35 mills with a total capacity of 73 million mt. In 2006, 14 producers operating 29 mills have a total capacity of 67 million mt. Operating profits in the
US steel industry hovered at around 0.1% between 2000 - 2003. Since 2004, the average operating profit for the
US steel industry is 10.3%. Other countries, notably
China, still have to go through this process. The
US steel industry is far ahead in this regard.
Mr. Gloom:
Interesting that you are mentioning consolidation and
China in the same sentence. Chinese mills are light years away from consolidating within
China and even further away from consolidating with multinational steel makers. Most Chinese mills are owned by provincial governments that have their own agendas. We also heard the story about shutting small, inefficient mills before. These things happen only at a crawling speed in
China. As per lifting the subsidies and reevaluating the currency, don't hold your breath.
Another fact is that consolidation has the biggest effect on a local level. If a consolidator like Mittal is buying steel mills from different regions, their leverage on steel prices will be minimal. On the contrary, if you follow the
Nucor model and only consolidate within your core region, i.e. the US, you will start to dictate the markets, and all other competitors and steel buyers follow.
Mr. Bull:
I don't think that any newly-formed entity in the US has much of a stranglehold even on regional pricing. Competition, domestically and from imports, is still fierce. Also, there are anti-trust laws. Note the decision by the US Justice Department that Mittal will have to sell one of their recently acquired mills through the takeover of ISG and the merger with Arcelor respectively. Weirton will be sold to somebody else.
The steel landscape has drastically changed in the past few years. It was a change for the better, despite the influx of foreign steel interest. The
US steel mills will be more efficient and competitive than many of their global rivals. More power to global restructuring!
Mr. Gloom:
I am not opposed to some consolidation in the industry, especially since some of the inefficient capacity could be taken out of the market. However, there is a limit to consolidation as well. Make too much of it, and you give undue advantage to steel makers and steel consumers will suffer. Competition is still decent, but the mills are gaining power with every mega-merger. They can play all kinds of games with smaller steel distributors or fabricators. Can we really trust them? And ultimately, who pays the money going in to the pockets of the steel mills? It's the final consumers such as you and I. We already pay more for our cars, appliances and houses. Too much consolidation will be certainly unfair.