If there's a cheering section for mills interested in buying
service centers, it's not on Wall Street.
While some distributors continue to look over their shoulder
at the possibility of mills moving into their home turf,
securities analysts who follow steel and other metal producers
don't see much support for such a move in the equity
"I guess anything is possible, but I'm not hearing an awful
lot about it," said Leo Larkin, equity analyst for the Standard
& Poor's division of the McGraw-Hill Cos. Inc., New York.
Like others, Larkin pointed out that producers such as Nucor
Corp., Charlotte, N.C., and Steel Dynamics Inc. (SDI), Fort
Wayne, Ind., have instead been either going upstream to secure
in-house supplies of scrap and metallics or, when they travel
downstream, look for fabrication or processing operations.
While he's aware of the theory that mills could turn to
distribution once "there's nothing left for them to buy,"
Larkin still thinks there's going to be more opportunities
Another analyst who isn't a fan of producers getting into
distribution is Charles Bradford, who follows the metals
industry for Soleil Securities/Bradford Research Inc., New
York. "I think they have better things to spend their money
on," he said, arguing that a mill could "antagonize its
customers" by buying a service center.
Bradford pointed out that, unlike in Europe, U.S. producers
have their own fully staffed marketing teams and "wouldn't gain
anything by having another sales force downstream." In fact, he
said, in certain cases it actually "might make sense" for a
distributor to acquire a mill if it perceived a shortage of a
crucial product. But in that case it would probably be a
relatively small mill to satisfy a specific requirement.
Moreover, as producers' share prices have escalated, this
proposition is probably "too expensive" for a distributor to
In Portland, John Rogers, who follows the steel industry for
D.A. Davidson & Co., noted that each era of consolidation
usually carries its own theme, with the most recent cycle
marked by "back-end" combinations rather than downstream
Does that necessarily mean a return one day to downstream
consolidation? "I think it's certainly possible, but I would
guess the priority will be more on the product side than on the
distribution side," Rogers said, citing such sectors as
reinforcing bar, pipe and plate fabrication.
One group that's already taken a hard look at the likelihood
of mills scooping up distributors is Moody's Investors Service,
whose analysts determined in June 2007 that while there are
"potential benefits" to a producer-distributor merger, "the
benefits of implementing the model in North America would be
outweighed by the likely challenges." Among other likely
drawbacks, Moody's saw little chance for achieving substantial
synergies and distributors' "thin margins" could undercut
mills' stronger results during a market up-cycle.
More recently, Steve Oman, a Moody's analyst and senior vice
president, described as "still relevant" the study's
conclusions that mills acquiring service centers "didn't make a
lot of sense." Distribution, he believes, is outside the mills'
"core competence." And as steel prices rose to $1,000 per ton,
mills enjoyed a bigger upside than service centers, Oman