When mini-mills such as Nucor Corp. and later
Steel Dynamics Inc. (SDI) established the viability of
electric-arc furnace steelmaking in the U.S., they overturned a
few sacred cows in the process. Traditional producers had to
change their game, while the knock-on impact of their strategy
helped refashion the way steel was produced.
Over the past few months, the next phase of
the two companies' business strategy has become clear. And
after watching with some trepidation as Nucor and SDI paid
billions of dollars to buy David J. Joseph Co. and OmniSource
Corp., respectively, many scrap executives are asking
themselves are changes of the same magnitude now taking place
in their own industry?
Consolidation in scrap isn't a new
phenomenon, of course, and was underway well before Nucor and
SDI piled into the market. The merger of Metal Management Inc.
with Australia's Sims Group set the tone for the latest round
of M&As in an industry where a move towards fewer, bigger
players has been under way for years.
The main drivers for the recent deals, many
believe, are record high prices and sustained strong demand for
scrap at home and abroad, which have brought the industry out
of the shadows into the sun. But there are two distinct
processes now taking place. The Sims-Metal Management merger
was a tie-up of scrap suppliers, and is part of the wider trend
towards consolidation in the global steelmaking raw material
sector that reached its peak in the recent offer by BHP
Billiton to buy fellow Anglo-Australian mining house Rio Tinto
for almost $150 billion.
The same thing has happened before in the
U.S. scrap sector, albeit involving far smaller sums, when a
wave of mergers and acquisitions swept the industry in the
mid-1990s. But there are big differences this time around-and
not because ferrous scrap is now selling at more than double
the amount it was a decade ago.
The emergence of mini-mills as major owners
of scrapyards, not just major buyers of scrap, has the
potential to reshape the industry in a much more fundamental
way. Some mini-mill operators, such as Commercial Metals Co.
and Gerdau Ameristeel Corp., already have a footprint in the
scrap business, but Nucor and SDI operate on a different scale
in terms of steel output, financial heft and ambition. Analysts
have widely praised the logic of their new strategy with scrap
prices at levels that until recently would have been undreamed
of, and exports to China and other overseas markets hitting
record highs, it's good business sense to lock in supply.
It's also a symptom of a changing world.
North American steelmakers, both integrated and mini-mills,
traditionally have been more protected from raw material costs
than their overseas rivals the increase of at least 65 percent
in benchmark iron ore prices announced in February will hurt
America's steelmaking rivals in China and Europe much more than
it will U.S. Steel Corp. and other blast furnace producers here
But this bullet can't be dodged forever.
Structurally high energy and other input costs look to be here
to stay. And in this environment, many in the scrap industry
are casting a worried eye at the change of ownership at two of
the sector's biggest suppliers and asking themselves what Nucor
and SDI have in mind for their new business arms. Nucor's Dan
DiMicco and SDI's Keith Busse have gone out of their way to
stress that it will be business as usual for customers of DJJ
and OmniSource. But will they really be run as profit centers
or, as one scrap industry member suggested to AMM, are
steelmakers only giving lip service to the profit motive while
they prepare to gobble up all the scrap for their own
"When push comes to shove, when the market
gets a little tight, they will make the irrational decision to
feed the furnaces instead of selling the scrap," the industry
source said. Even if that's not the case and the mills continue
to pay market prices for scrap, their controlling interest in
the scrap suppliers means they'll probably be first in line to
For Nucor, SDI and other steelmakers who own
captive scrapyards, that's a good set of options to have. For
scrap consumers who don't have the ability or the desire to
lock in their own supply, as well as those who rely on
published indices for setting scrap prices, it's a concern. And
for those who remember a time when the biggest players in the
scrap industry were scrap companies themselves, it's another
break from the past.
SENIOR VICE PRESIDENT