There has been a recent flurry of steel producer acquisitions of scrap processors (SDI-Omnisource, Nucor- DJ Joseph, DJ Joseph-MRS, Galamba) and persistent rumors that others are circling targets. By my calculations steel producers now control about 40% of the US ferrous scrap industry. They controlled less than half that only a few years ago. If the experience of US integrated producers and the iron ore industry at the turn of the last century is anything to go by, there’s more to come.
This paper describes the process of vertical integration into iron ore production pursued by steel producers in the 1890′s. In 1896 65% of the total iron ore consumed in the US came from mines located in the Lake Superior region. There were more than 100 companies located in the region and they produced about 10MT tons of ore between them. But only one company, the Oliver Mining Company, was owned by a steel producer (Carnegie Steel).
In four short years, this had all changed. By 1900 output in the Lake Superior region had grown to 19MT. More significantly over 74% of the output was owned by 8 steel companies, and 3 steel companies controlled 52%. Carnegie Steel had made its first iron ore acquisition in 1892 and was fully self sufficient in iron ore by 1897.
What can we learn from this? Whatever the initial drivers for backward integration – (fear of having to pay a premium for inputs; opportunity to achieve an advantage over competitors; need to control quality etc) – once the case is made and the first movers have moved, the process can be fast and widespread.