Tech Industry

Going Vertical: Cost Management In A New Era Of Steel Integration

Date Added: May 2010
Format: PDF

The rumblings have been heard for several years now, but in late March 2010 it finally seems to have happened: BHP Billiton and Vale announced deals that may spell the demise of the traditional, 40-year-old benchmark pricing system for iron ore.1 While steel manufacturers are fighting back, contract prices are once again soaring, some upwards of 90 percent over last year's benchmarks.2 Could the combination of the threat of abandoning the benchmarks and the looming price increases be just the thing to push steel producers back into the arms of vertical integration?.Back in the early days of steel manufacturing in the United States, the vertically integrated model (in which various or all stages of production are owned by one company) reigned as large companies - and equally large personalities - sought to dominate markets. Moguls such as Andrew Carnegie, Henry Ford, and John D. Rockefeller fathered the business model of owning all stages of the supply chain, from the raw materials to the railroads. As globalization made it easier to outsource various stages of production, the vertical model died out. New management philosophies favored focusing on "Core competencies" and specialization. The current merger trend within the steel sector involves a significant number of cross-border transactions. Especially with upstream integration, raw materials are often sourced in territories where producers are not typically operating - and the effort to invest in or develop those sources is often complicated by geopolitical concerns outside a company's control. Producers looking to vertically integrate abroad may need to contend with a range of thorny issues - from complicated bureaucracies to civil unrest.