Another powerful consolidation wave is engulfing the steel industry. So far, though, service center executives and buyers have been uncharacteristically quiet in voicing opinions, probably because the jury still is out on the supply-side impact of the merger and acquisition frenzy.

“The metals industry is experiencing a wave of consolidation,” agrees Jerry Darrigan, the purchasing department head at structural steel fabricator Coral Steel in West Palm Beach, Fla., but he is more concerned about day-to-day business: “The market for construction metals is poor, yet market prices are down; costs are up and business competition is fierce.”

Investors, on the other hand, are expecting more mergers or buyouts that will put more power in the hands of fewer players. In fact, it's already obvious that the M&A activity has triggered—or, at the least, bolstered—the global increases in prices since December for steel mill products worldwide.

Fusion in the past was seen as the path to the reduction of excess capacity; that is, in concentrating production on the most efficient installations and eliminating loss-making operations. Today, things have changed. What one top executive recently calls the “revitalization of the steel industry” has left many companies cash-rich and able to finance takeovers and acquisitions. Banks are now more willing to fund such deals.

The number of global producers continues to shrink as companies jockey for position, says analyst Kimberly DuBord at Briefing.com. “The steel industry has been going through a renaissance of sorts over the past few years, provoked by a surge in consumption and production in China,” she writes to clients. “The resulting wave of M&A and producer rationalization in an industry that has suffered from historical boom bust cycles is a positive development, enabling companies to better calibrate future production to control prices.”

But with a global feeding frenzy going on, producers must join in or get left behind. And while the next takeover target is anyone's guess, the one certainty is M&A activity will continue to be supported by strong steel prices and flush balance sheets. “This is an extremely active period in the steel industry,” says John Amodeo, the chief financial officer at Samuel Manu-Tech in Toronto, a value-added processor of various industrial products made from metals and plastics.

He suggests that ownership consolidations in the international steel arena—and softer end-user demand in certain markets of North America—eventually should support stable-to-down pricing ahead. Analyst DuBord agrees, saying that steel prices are expected to rise in the low double-digit range in 2007 and then stabilize in 2008. But, some investors disagree, saying the steel companies need financial heft these days to compete globally.

Rather than being a sign of the peak for commodity prices, some investors say the corporate deal-making could help put a lid on supply and put even more upward pressure on a host of commodity prices. But they really don't have any historical markers. Over most of the past 20 years, consolidation in the steel industry has been prompted largely by adverse circumstances. Today, it's different: “For producers aiming to move closer to end-markets, particularly high-growth areas like China and India, it's much easier to acquire capacity than to build a steel production facility outright,” says DuBord.

Such is the enthusiasm for financial consolidation now that it is penetrating most corners of the steel world. Dutch-based Mittal Steel (whose U.S. plant is the successor to Inland Steel, Republic Steel, Bethlehem Steel, J&L Steel and others) is finalizing its merger with Arcelor of Luxembourg this summer. Mittal's purchase of International Steel Group provided it with exposure into the North American market while Arcelor provided a cheaper way into the European market. This combined company will produce 10% of the world's steel, making it three times the size of its closest rival.

Over the past few years, Nucor has purchased six other steelmakers, most recently Harris Steel of Canada, while U.S. Steel, after absorbing what was National Steel, just recently became more aggressive, purchasing Lone Star Technologies. The Argentine-Italian Rocca family's Techint Group now owns Maverick Tube of Missouri.

Ternium is based in Luxembourg but its steel operations are in Argentina, Mexico and Venezuela. In Japan, there's a new company, JFE Steel, formed through the merger of NKK and Kawasaki Steel. U.S.-Canadian plate and pipe manufacturer Ipsco has acquired NS Group seamless tube-maker and itself is being bought by SSAB Svenskt Staal of Sweden.

Russian steel companies have become significant players in the global consolidation of the industry. Severstal has become increasingly active, with acquisitions or major investments in Italy, the Czech Republic, Denmark and the U.S.—ranging from the former Rouge Steel in Michigan to the new SteelCorr plant in Mississippi. Russian steelmaker Evraz Group has bought plate and wide-diameter line pipe maker Oregon Steel Mills and pipe and bar maker Rocky Mountain Steel Mills.

And then there are the Indian steelmakers: By acquiring the Anglo-Dutch steel firm Corus, India's Tata Steel is now one of the world's top five steel makers. India's Essar Global is buying Canada's Algoma Steel and is buying into the under-development taconite iron and steelmaking Minnesota Steel project.

“The greatest risks to a continued M&A outlook are a slowdown in global economic growth and the potential for China to begin exporting en masse,” says DuBord, “causing a shock to steel prices and in turn straining leveraged balance sheets.” This, of course, would be good for buying organizations, which would see an end to the current steel-pricing bull cycle.