The steel giants are all making vertical integration to subdue expenses on raw material.
Steel industry is very sluggish at present owing to the downtrends in supply demand ratios. Production rate has come down and there has been price corrections on account of low demand for steel in the market. The steel behemoths like Nucor, US Steel, ArcelorMittal and others are all trying to manage their expenses by cutting expenditure on raw material, logistics and fuel.
Vertical integration is a common strategy that the companies are using in the current steel market scenario to avoid extra expenses and gain realizations. Vertical integration is merging together of two businesses that are at different stages of production—for example, steel manufacturing and iron ore mining.
The steel giants have already started following the trend for their benefit. The most important disbursement for steel industry is iron ore and then coal. The steel industry, no matter big or small has no existence without iron ore and cannot manufacture steel if the fuel coal is not supplied. US Steel possesses an Iron ore mine and also it has a share in two joint ventures with Hibbing Taconite Company and Tilden Mining Company allowing its access to around 900 MnT of Iron ore reserves. In addition the company has a production capacity of 25 MnT of iron ore pellets annually which it expects to expand by over 10%.
ArcelorMittal, following the trend of vertical integration, owns both coal and iron ore mines. It has plans of expanding its annual production capacity of iron ore from 56 MnT pa at present to 84 MnT pa by 2015. Furthermore, it also has an annual output of 8 MnT coal.
Adopting vertical integration is still not a permanent solution for the steel industry as it comes along with jeopardy such as losses, but alongside, it also helps in reduction and control of costs.