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Short-term angst vs. long-term value?

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Was it a mistake? As the global commodity boom disintegrated over the past eight months and the wisdom of decisions made when the going was good has increasingly been called into question, that is something many industry executives have been asking themselves. Some strategic moves made at the height of the bubble, such as Rio Tinto's $38.1-billion acquisition of Alcan, have been proved to be all-but-disastrous for the buyer; others, notably BHP Billiton's aborted bid for Rio, nearly so.

But what about the wisdom of a couple of other raw material acquisitions-Steel Dynamic Inc.'s $1.1-billion purchase of scrap processor OmniSource Corp. and Nucor Corp.'s $1.44-billion buy of its main scrap broker, David J. Joseph Co.? Both were made just as the commodity feeding frenzy was at its height and the "supercyle" theory of continuous growth was really taking hold. And while the sums of money involved may have fallen far short of those in the multi-billion-dollar deals mentioned above, both acquisitions were almost certainly based on the assumption that scrap prices would remain at levels far above those seen today.

In other words, the mills overpaid, as one industry analyst notes in this month's cover feature. But asked whether the rationale behind the acquisitions has been proved to be wanting, analysts respond with a cautious "no"-or, at least, "not in the long term." The mills may have paid too much, but the assets weren't bought for short-term gain-they were bought in order to support the mills' longer-term needs for raw material supplies and, perhaps, as profit centers in the future. When the steel and scrap markets shake off the current downturn and return to something closer to normality (read insatiable Chinese demand, a weak dollar and a scramble for global raw material supply), the acquisitions may once again look like a smart move.

One industry source even draws a parallel between the purchases of OmniSource and DJJ and moves made by the Chinese government to secure its own supplies of raw materials, given that China is increasingly being seen as a relative winner in the downturn that could be taken as high praise-although there a couple of big differences. Beijing doesn't have shareholders to answer to, and many of its biggest acquisitions, such as the recent move by its state-owned aluminum producer to buy a chunk of Rio Tinto, have come after asset values declined from their wildly overblown peaks of 2007 and 2008.

The uncertainty over the extent and duration of the global recession looks set to be with us for some time. But even if there can be no definitive answers for a while yet, the question remains was it a mistake for Nucor and SDI to shell out $1-billion-plus apiece for scrap suppliers just as the commodity bull market was entering its final stage?

Unfortunately, the people who are best-placed to answer this question-the top executives at Nucor and SDI who masterminded the acquisitions-aren't commenting. Perhaps they don't feel the need to justify decisions for which they already laid out a rationale at the time of purchase. But a lot's changed in the past year, and many assumptions that were considered almost unquestionable at the height of the boom have since fallen by the wayside. Any time those executives want to revisit the issue, we're pretty sure there will be a ready audience waiting to hear what they have to say.

KEVIN FOSTER

Managing editor


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