2003 Ferrous Scrap Supplement: Urge to Merge

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.

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 be the ones to shut down facilities—and thus miss out on the next surge in demand.

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 filed 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.

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.