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The new kings of scrap

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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 at home.

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 furnaces?

"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 buy.

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.

DAVID BROOKS

SENIOR VICE PRESIDENT


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