Combined Effect

Some in the steel mini-mill industry see consolidation as the primary way to strengthen the position of U.S. companies. Larger companies benefit not only from economies of scale, they also appear more viable to potential investors, demanding more of their attention.

Nucor’s acquisitions of Birmingham Steel and Qualitech Steel are recent examples of the further consolidation among electric arc furnace (EAF) steelmakers that many within the industry see as inevitable. The timing of these events seems to be the one thing in question.

Phillip Casey, president of AmeriSteel, Tampa, Fla., says that consolidation among mini-mills is unquestionable. "It’s strictly a matter of how fast it will occur," Casey says. "I would anticipate within 24 months there would be substantial consolidations. There are really no legacy cost barriers amongst the mini-mills as there are amongst the integrated mills in terms of retiree and medical costs. The only constraint at this time is lack of currency."

However, Casey says this constraint has loosened somewhat in the past 30 days, because of the perception among investors that cyclical industries are now in favor and that the recent economic slowdown has bottomed out and is improving.

David Sutherland, president and chief executive officer of IPSCO, Lisle, Ill., says a number of people have seen the long products segment of the industry as ripe for consolidation, similar to the integrated sheet producers. Sutherland says, "Again, just as we’ve seen with respect to Nucor and Birmingham, I could see more of that happening."

Dan DiMicco, president and CEO of Nucor, Charlotte, N.C., says that companies within other industries have consolidated within the last 15 years, and that it’s time the mini-mills consider this tactic. "If you take a look at the steel industry, a lot of consolidation has taken place on the raw materials side, both from the scrap standpoint and the iron ore standpoint," he says. "A lot of consolidation has taken place on the customer side with service centers, fabricators and automobile companies."

Says DiMicco, "With the global economy today and the global pressure from imports, our industry is extremely fragmented now – not only in the United States, but globally – and there’s going to be a lot more consolidation. But there will always be a place for a well-run, single-location mini-mill."

Casey, however, questions the viability of single-location mills. "I think they are kind of an endangered species. It’s not so much the threat of global competition, it’s more a reflection of the shifting of the market domestically," he says. "A single-location mill has commercial limitations in terms of its ability to offer wide geographical coverage and a wide product range as well as scheduling flexibility. There has been a great deal of consolidation in the service centers, and as with most industries, they are also looking to simplify their supply chain."

Casey says these companies prefer suppliers who can offer them one-stop-shopping. "A single location mill can handle that within a defined geographical region, but that becomes less attractive if there are more geographically dispersed and more financially competent players in the market."

Thomas Danjczek, president of the Steel Manufacturers Association (SMA), Washington, also expects consolidation among companies who do not have a particular product or geographic niche. "Those that stand by themselves without the product or geographic niche are exposed to having to sell out or combine with others."

Danjczek says product niches will allow some mini-mills to remain smaller. Companies such as Charter Steel, a Wisconsin-based manufacturer of special-bar-quality and other high-end, coiled round bar, rod and wire used in engineered fasteners, automotive components, springs and bearings, Danjczek says, makes a unique product that allows it to remain small yet viable.

"The other reason you’re allowed to stay smaller is if you have a regional preeminence, a regional superiority," he says, citing the former Birmingham Steel’s plant in Seattle as an example. "Nobody else is around them, they have a good product, and, therefore, they can stay smaller."

DiMicco agrees that the companies focusing on specialty steel products can remain small, as does Sutherland.

"There certainly could well be a place for small niche players who are serving a marketplace that is fairy close to home," Sutherland says. "But certainly scale appears to be mattering more in general. Often times the customers themselves are aggregating, or they have a broader geographic interest themselves, and they would prefer to deal with fewer market participants," he says.

The advantages to AmeriSteel’s multiple locations, Casey says, is more than the scope of its product offering and geographical coverage. Additionally, multiple locations give AmeriSteel an "advantage in leveraging purchases of materials, negotiating with different electric power grids, exchange of best operating practices amongst the operating units and, I guess, a greater access to critical capital and management talent resources."

While DiMicco hesitates to say economies of scale help larger EAF companies, he does say that there are some economies on the purchasing and marketing sides of Nucor’s business. "I think it’s just helpful to be a diversified, strong market leader in any product line that you’re in."

However, Casey says that economies of scale are definitely a boon to larger mini-mill companies. A company’s critical mass can help it to access capital resources as well as provide scheduling flexibility among multiple operating units, he says. "And probably more prominently is the spreading of sales, general and administrative expenses over a larger unit base," Casey adds.

Sutherland also believes that economies of scale are at work for the larger mini-mill companies. "It’s not only scale from a vertical perspective," he says, "I think it’s scale from a horizontal one because every sector of the steel industry cycles somewhat differently. It also tends to smooth out earnings a bit if segments of the market cycle differently."

Danjczek is somewhat skeptical, however. "Time will tell us whether big is better. It’s early in the game to know whether the consolidation of the EAF companies will make it better. But, certainly, you get rationalization of equipment to some degree." He adds that a company might be able to optimize facilities by changing the products run or the running times. Danjczek also suggests that by changing sizes on the rolling mill less often, companies could get longer production runs and better productivity.

Such questions about economies of scale also lead one to consider whether or not the larger mini-mills can affect scrap pricing in their particular regions.

"Nucor doesn’t really control the price of scrap, the supply and demand situation does. There’s no one company that can have that kind of impact in a market as big as the scrap market," DiMicco says. "Certainly, if we’re not buying, or if we are buying a lot, it will have an impact, but no more than any other buyer or seller in the marketplace. Certainly the scrap yards can impact it as well by how much they decide they want to sell or not sell."

Casey agrees. "The availability of supply and demand for scrap will be a greater influence than any single purchasing entity," he says. "I also believe that the transportation infrastructure plus the arbitrage ability of scrap brokers can negate any market dominance of any one individual purchasing entity."

Sutherland says that a company’s strong order book can send scrap prices rising. He also says that if scrap begins to exceed what is considered fair market price, mini-mills will pursue scrap alternatives.

Danjczek says that at current capacity levels, mini-mills have little influence on scrap pricing. "By that I mean the largest companies are only 20 percent at best of the EAF market. I think economic studies show that 20 percent does not drive the market," he says. "Do they affect it? Sure they affect it. Do they affect it over the long-term? No. No single company is large enough to affect the market.

"Scrap is a fungible product. It can move for a relatively low cost," Danjczek says. "If the price is distorted regionally, for a few dollars, it can be shifted."

The opinions vary somewhat on the scrap side of the industry.

Stuart Simms of Ferrous Processing & Trading Co., Cleveland, says it’s an issue of supply and demand. "Any mill, regardless of whether it’s a mini-mill or not, has the ability to affect pricing in its particular region depending on what its order book is."

Simms continues, "If two consumers in the same region both have an appetite for scrap, there’s only so much scrap available in a region or available to move into a region. But if consumer A has a healthier appetite than consumer B, and consumer B does not need to reach that scrap, then you are going to probably see a flatter line in your pricing. At the same time, if consumer A has a healthy appetite and consumer B has a less than healthy appetite, you may see a downwardation in the market."

The prospect of additional consolidation among mini-mills has some scrap dealers concerned.

"I think that the scrap industry in general, any time you have a consolidation of consumers, worries about the tonnage that is going to be sold into the marketplace," Simms says.

He explains, "If company A and B are two independent consumers, and they are consuming a combined rate of, say, 100,000 tons, and company A and company B combine for economic reasons, now the combined tonnage use is 70,000 tons; that’s a 30 percent displacement of material in the marketplace. That has an effect on the market."

Jack Vexler of Monterey Iron & Metal, San Antonio, says, "I think there eventually will be some anti-trust issues raised with mini-mills that have their own preparation facilities." He adds that since many mini-mills dominate in their local markets, in effect, they have control of the price.

This issue of price manipulation resulted from consolidation concerns Vexler says, and he will be watching the Justice Department closely as they study the mini-mill industry.

However, some in the scrap industry are in favor of any measure that will strengthen the industry.

John Sacco of Sierra Iron & Metal, Bakersfield, Calif., says "If the [steel] industry is not healthy, than everything is in trouble. So, if consolidation makes it healthy, so be it."