Wanted: U.S. steel mergers

Two of Russia's steel companies are in merger talks that could lead to the creation of the world's sixth-largest steel company. Disturbingly enough, overzealous anti-trust policing may block this type of consolidation in coming months in America, according to some analysts.

Steel analysts agree that consolidation can only help a global market burdened with oversupply. Anti-trust regulators could differ with this consensus, however, to the detriment of the U.S. steel industry. Consolidation cops have an undistinguished record on blocking steel mergers, such as preventing U.S. Steel's attempt to buy National Steel in 1994.

In the coal industry, there has been more recent evidence of overzealous anti-trust policing that analysts say augurs badly for future steel mergers, with the Federal Trade Commission giving Arch Coal a second information request on its bid to buy Triton Coal. "This is a review," said Merrill Lynch metals analyst Dan Rolling, "that should have taken five minutes," since there is a gross overabundance of coal. Instead, regulators are effectively suspending a merger that should have gotten speedy approval.

In about one year's time, U.S. anti-trust officials could begin blocking much-needed mergers of U.S. steel companies, Mr. Rolling predicted. Eighteen months ago, more than 40 steel companies had filed for bankruptcy, and seven have been bought out. By the time the number of U.S. companies is reduced to 20 or 30, anti-trust watchers could ramp up their policing, he added.

Consolidation would put the steel industry on a predictable cycle. For starters, it would reduce the glut in the global market, which would help prices to rise and allow companies to reduce their costs. The increase in prices and reduction in costs allow companies to reduce production when demand slackens and prices fall, thereby stabilizing prices. If companies are unable to cut costs by consolidating, they are forced to continue producing at full capacity, even when demand falls. If regulators overplay their hand, they will interrupt this stabilization cycle.