I know we’re a little early for 2009 prediction posts, which usually come sometime between Thanksgiving gluttony and sloppy Auld Lang Syn sing-alongs. But I wanted to get these off my chest for a couple of reasons. First, the steel markets are extremely volatile, so it pays for buyers to stay out in front of market trends. And second, in case I am right about any of these…I wanted them in writing before the predictions come true (although as with any real prediction, this increases the likelihood of egg on my face).

So, my first prediction for Steel Industry Trends to Watch in the Next Year is…

Industry Consolidation. Deep pockets from several years of extremely high prices and profits are allowing a historically fragmented industry to consolidate. The global steel industry is filled with large global corporations with annual revenues exceeding $20 billion, but the 1.3 billion tons per year industry remains heavily fragmented. The top 10 steel producers by volume only account for 27% of global production. The rise in steel prices and profits for mills since 2004 has given the mills capital to make merger and acquisition moves on a global scale.

China’s steel industry, which currently accounts for more than one-third of global production, is seeing the most consolidation in response to a 2005 edict from its government, which wants the 10 largest mills to account for 50% of Chinese steel production by 2010. Last year, the top 10 Chinese mills produced over 35% of the country’s production, but rumors have emerged of two potential mergers of large mills - which could push the top 10 figure close to the target 50% by the end of 2009. Although Asian mills have largely focused on internal consolidation within their region, the trend in the rest of the world will continue to be global consolidation, as mills attempt to expand their operations and revenues into new emerging regions.

While consolidation typically favors the suppliers’ negotiating position, the heavily fragmented steel industry has much room to consolidate before mills are able to manipulate market pricing simply due to the size of their market share. The exception to this statement would be if mills become heavily consolidated within a particular region. This would potentially allow for price inflation within that region if trade is also artificially restricted by national governments.

*** This post is based on my feature article, Steeling Your Profits, in this quarter’s issue of SupplyWatch. The full article is here and you can sign up for a free subscription to the electronic version in the top right corner of this page. ***

Mike Petro is the Senior Category Manager for Metals in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.

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