Welcome Back, Vertical Integration: Changes in the Steel Industry

The twists and turns in our modern economy recently caused some companies to look back at older, retired practices and strategies -- and certain industries now realize that these "old school" routines could help business. For example, steelmakers and iron-ore miners are once again noticing the benefits of vertical integration, which fell out of favor in previous decades. The Wall Street Journal shares, "In an effort to gain independence from the mining giants that control the world's iron ore and have raised prices more than 80% this year alone, a growing number of steelmakers are shopping for their own iron-ore mines. Meanwhile, several ore miners are seeking to cash in more directly on the world's growing demand for steel."

In the past, it was normal for steel-producing companies to own their own iron-ore mines; vertical integration allowed companies to control a product's entire lifespan from raw material retrieval to the final item sold to consumers. During the company's early days, the Carnegie Steel Corporation popularized vertical integration as management control, owning and controlling each aspect of steel production from mines and mills to coal mines and coke ovens. However, this process became outdated in recent decades, when it was decided that increased competition from foreign companies made it necessary -- and more profitable -- to focus on steelmaking.

But times have changed, and the market is facing new troubles. GlobalInsight's John Anton notes that today's steelmaking problem lies in the lack of excess capacity in the market. "For one company to get what it needs, it now has to outbid another company," he says. More vertical integration could help solve this problem. The Wall Street Journal checks off the companies that consider Brazil the optimal place to head back to the basics of vertical integration: "ArcelorMittal said it would pay $810 million for the Brazilian iron-ore assets of London Mining PLC and agreed to develop a port facility to ship iron ore, while a consortium of Japanese steelmakers joined the bidding fray for a collection of Brazilian mines ... Also interested in those mines are steelmakers from China, India and Russia. Meanwhile, Brazil's Cia. Vale do Rio Doce, the world's largest iron-ore miner by volume, said last month that it planned to build a $5 billion steel complex."

Although vertical integration is making a name in the steel industry, the term might interest different industries interested in efficiency and lower transaction costs. Oil companies often adopt their own type of vertical integration -- which was explored in the book Oil on the Brain, one of my most recent reads. Who knew oil was such a fascinating topic? Furthermore, American Apparel, currently more famous for sexual harassment cases and explicit advertisements than management techniques, considers itself a vertically integrated industrial company. Even Google could soon become a vertically integrated company. To learn more on the topic, a quick search reveals numerous charts and articles on the drawbacks and benefits of vertical integration.

- Amy Edwards

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