We're getting to a point where billion-dollar deals don't make much of a splash, but the news that OmniSource has agreed to a takeover by Steel Dynamics Inc. is important: it's further evidence of something I wrote about several weeks ago — that there is a "tightening" underway in the metallics markets.

I don't think "shortage" is the right word, because scrap is a fairly obvious example of something that should become more available as the demand increases. But, this purchase is just one more bit of evidence that the growing size and influence of metal-producing companies is enhancing the demand forecast for the commodities that they consume.

Mining companies have been increasing in valuation for several years, and in the past two years that sector has been the scene of dramatic consolidation. Moving up the process chain, aluminum and steel companies have been in consolidation mode, too. SDI's purchase of OmniSource is part of this trend, but it shines a light on the emerging tension in the scrap market — because the assets (on both the supply and demand side of the equation) are falling under the control of fewer players.

To be clear, SDI is not buying OmniSource in order to control the scrap market: it's doing it because of its own particular needs.

SDI is an electric steelmaking outfit somewhat modeled after Nucor Corp. It's not nearly as large, but its output is more concentrated in higher-quality flat-rolled steels than the mini-mill giant. That means SDI's need for high-quality scrap steel or other iron-rich raw materials is critical, but its major competitors for those products (steelmakers like MittalArcelor, Nucor, and U.S. Steel) have the buying power that goes with producing 20 million tons/year of raw steel, or more.

In steel's consolidation game, SDI has been rumored to be both hunter and hunted. Its stock is closely held so the latter is not too likely, and its purchases have been effective, but not very buzz-worthy: a smaller rebar producer and some galvanizing lines were the most notable. Buying a scrap processor adds a new dimension to SDI, but it also helps it to solve the metallics puzzle at the heart of electric steelmaking.

For years SDI has nurtured an iron-carbide technology to supply high-grade iron to its EAFs, and in September it sealed a project long in development for a rotary-hearth ironmaking operation in Minnesota. 

By buying OmniSource, SDI is covering its bases: if it wants to grow as a steelmaker it has to secure raw materials to feed its furnaces. It would seem to have both the iron and scrap problems solved now.

So, SDI is pursuing its own growth strategy, responding to the broader industry trend of consolidation, but every company in this market has metallics needs, too. Its purchase of OmniSource is extending that trend.  The impact of this — like that of aluminum producer Aleris Inc. buying Wabash Alloys — may not be fully understood until a shortage truly develops.