Steel’s Revival

In 1941, Art Rooney decided to change his football team’s name from the Pittsburgh Pirates to the Pittsburgh Steelers to reflect the city’s blue-collar image. Like the football team, the steel industry has had a difficult past 25 years. But also like the football team, the industry has gone through a remarkable turnaround.
In today’s IBD, Amy Reeves notes:

In the 1980s and ’90s, steel was a symbol of the dying Old Economy. Mines closed, companies went bankrupt, and workers were laid off despite their union muscle.
But even as the new tech workers declared themselves to be the future, they were still driving steel cars, eating out of steel containers and living and working in buildings framed with steel girders. So after enough cutbacks, demand was bound to outstrip supply.
That finally happened in recent years, bringing better days to steel producers.
This time, companies aren’t content to simply ride the swings of the commodity cycle.
The industry’s leaders are taking steps to prepare for the next downturn — by cutting costs, improving technology and, above all, consolidating. That’s especially important right now, since some signs are showing that the current upturn may have peaked.
Makers of specialty alloys, meanwhile, are still rising untrammeled. The booming aerospace, technology and medical markets are constantly looking for high-tech metals with special properties.

With the emergence of Mittal (MT), the industry is going through a rapid consolidation:

The number of steel firms in North America and Europe has been shrinking for some time.
Since the end of 1997, according to Considine, no fewer than 32 U.S. steel companies have filed for bankruptcy. The last was Stelco in January 2004.
More recent headlines have shown the industry’s urge to merge. In the last few months, a bidding war erupted between European giants Arcelor and ThyssenKrupp for Canada’s Dofasco. No sooner did Arcelor emerge the victor than Mittal Steel moved in with a hostile bid for Arcelor.
Europe started the consolidation trend before North America did, Sharkey notes. That explains why the Continent holds some of the largest and richest steel makers. But as the Dofasco battle shows, they’d still like a piece of the North American auto market.
Analyst Chris Olin of Longbow Research expects to see more of this, since the industry is still “way too fragmented.”
If Mittal succeeds in buying Arcelor, that will noticeably de-fragment the industry right there, since the new firm would be bigger than its next three rivals combined.
“Mittal’s attempt to buy Arcelor is a game changer,” Olin said. “Everybody’s in play now.”
At this point, those in the U.S. steel industry sound less worried about Europe than about China. China supplies 30% of world steel production, Sharkey says, and is growing at warp speed.
Sharkey and Considine feel the U.S. steel industry has suffered from unfair trade practices and foreign government subsidies. “We have a very competitive industry globally,” Sharkey said. “But we can’t compete with governments.”
Considine believes that President Bush’s hotly debated decision to impose steel tariffs from March 2002 to December 2003 gave the domestic industry crucial cover while it restructured.
Olin disagrees, saying a change in the dollar and skyrocketing shipping costs were what really curbed imports.

The other big part of the steel story is China. Here’s a chart of the Dow Jones Steel Index since April 2003.

Posted by Eddy Elfenbein on February 6th, 2006 at 10:58 am

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