While most mill executives publicly disavow any plans to acquire service centers, Esmark’s imminent takeover of Wheeling-Pittsburgh Steel, and apparent interest in Mittal’s spinoff of Sparrows Point, continue to fuel the conjecture about such mixed marriages.

The very concept of a distribution company like Esmark acquiring mills is an unexpected and backward-seeming twist in the steel market’s consolidation. Addressing a group of toll processors last month in Orlando, Esmark CEO James Bouchard emphasized that his company’s strategy is not simply integration of steel production and distribution. Rather, “Esmark constantly strives to reinvent itself, starting with the end customer and working backwards,” he said. 

Esmark is committed to turning around Wheeling-Pitt, he told the tollers. “After the merger, we will go to 75 percent downstream [direct] sales. We will bring a knife or zinc or paint or tin to every piece of product that goes out the door. The idea is for the mill to disappear. Within 18 months, we will not sell master coils into the market.” Clearly, Bouchard and Esmark envision a sort of hybrid steel supplier that defies any conventional definition.

Bouchard discounts talk of American steel adopting the European model, in which mills own captive distribution. “In Europe, it is very different. They segregate their markets much more effectively than the U.S. In automotive and appliance, they use toll processors to execute. In commodity areas, they use their own service centers. They’re very good at recognizing their markets and identifying the lowest cost means to service the customer.”

Esmark aside, there are other compelling arguments against mergers of mills and service centers. Would a takeover by a mill necessarily make a service center more successful? Would such a captive service center be forced to buy steel from its parent, rather than from the most logistically sensible source for each customer? Would a mill gain by giving preferential pricing to a sister company when it may make more selling the steel on the open market?

Rather than buying into distribution, mills have shown an inclination to invest upstream in sources of raw materials and downstream in various end-use markets. Nucor, for example, recently began production of DRI at its Nu-Iron operation in Trinidad and added Verco Manu­ facturing, maker of steel floor and roof decking, to its growing metal building systems business. Likewise, Steel Dynamics  invested in the Mesabi Nugget iron-making project in Minnesota and plans to expand flat-roll painting and coating capabilities at its Jeffersonville, Ind., plant.

Mills have developed deep, cooperative and effective relationships with independent service centers over the past few decades. The percentage of mill output that passes through distribution has continued to grow, which suggests the American model is aging gracefully.

Would vertical integration bring added value to steel’s ultimate end-user? If not, then there is no point. The concept of a European model in the United States may sound sexy at first, but upon closer inspection the idea has a few warts.