The recent contest for control of Arcelor, won by Mittal Steel, will lead to the combination of the world's two largest steel companies and, as such, represents a watershed event for the global steel industry. Many casual observers of the business assume that the race for supremacy will be over once this fusion is completed, since the new company will be the No. 1 steel producer by output in North America, Europe, and South America—and will be more than three times larger than its next largest competitor.

But the race is far from over. In baseball terms, it's the bottom of the first inning rather than the bottom of the ninth. Consolidation has become the mantra of the steel business in recent years, as the forces of globalization sweep through the industry. Steel companies now operate on a worldwide basis, across country and continent lines, as they seek to control their operating environment and better serve their customers.

In light of this, going forward I believe the most successful major steelmakers will have the following characteristics:

• They will own a balanced portfolio of assets in developed and emerging markets, benefiting from the stability of the former and the low costs of the latter.
• They will become increasingly self-sufficient in the necessary raw materials used to manufacture steel—particularly iron ore and coking coal—as the volatility of the market price and availability of these resources in recent years has challenged steelmakers.
• They will embrace new technologies for making steel better, faster, and more cheaply.
• They will concentrate on producing higher grades of steel, such as automotive steel, in order to differentiate themselves from commodity producers.

INDUSTRY SUPERPOWERS. This combination of strengths will allow the major steelmakers to better regulate and control pricing and maintain a more stable operating and financial environment. That, in turn, will likely lead to a re-rating of the industry by the financial markets, as its historically severe cyclicality is moderated by the consolidation efforts of the major players.

Most industry observers believe the steel industry is heading toward a small handful of "superpowers" that will each produce in excess of 100 million tons a year. This raises the questions: Who will emerge as the industry leaders along with Arcelor-Mittal, and how smoothly will consolidation proceed?

Despite its current No. 1 position, Arcelor-Mittal currently controls only about 10% of the world steel market. Indeed, the top five steelmakers combined account for only slightly more than 20% of the 1.1 billion-ton world market. In contrast, in the much more consolidated automotive industry, the top five producers control approximately 55% of the world market, a number which should increase even more if various consolidation scenarios occur, such as a possible alliance between GM (GM) and Nissan (NSANY)-Renault.

GLIMPSE OF THE FUTURE. So who are the potential challengers to Arcelor-Mittal for supremacy in steel? The answer could come from many places around the world. The Chinese steel industry, which is the world's largest and accounts for more than 35% of global output, is currently consolidating internally under the active encouragement of the Chinese government. The emerging survivors will have a dominant foothold in the world's largest steel market and will possess the size and financial might to become global consolidators if they choose.

Similarly, the Russian steel industry, which includes some of the world's lowest cost and most profitable steelmakers, is also undergoing a process of internal consolidation. The eventual winners there will surely compete on a worldwide stage. We have already seen a glimpse of this future as Severstal and Evraz have both pursued several international acquisitions, including Severstal's recent attempt to merge with Arcelor.

Outside of China and Russia, there are several prominent players such as US Steel and Nucor (NUE) in the U.S., Nippon Steel and JFE in Japan, POSCO in South Korea, ThyssenKrupp and Corus in Western Europe, Tata Steel and SAIL in India, and Ternium, Gerdau, Usiminas, and CSN in Latin America. Any or all of these companies could become acquirers and create formidable counterweights to Arcelor-Mittal.

MIXING TRADITIONS. Consolidation in the steel industry will necessarily involve the merging and synthesis of cultures as well as companies. Understanding these cultural differences, being sensitive to their nuances, and managing them correctly, will be the difference between success and failure. For example, the Arcelor/Mittal merger typifies the challenges of combining companies with different corporate cultures and backgrounds.

Arcelor is a traditional European company, with separate management and supervisory boards and an orthodox way of operating. In contrast, Mittal Steel has been defined by its entrepreneurial spirit, boldness, and the efficiency of its chairman, Lakshmi Mittal, and his family, who control the company. Whether these two great companies with totally different corporate cultures can find a common meeting ground remains the major unanswered question in their connection.

As steelmakers around the world contemplate growth strategies, their future moves will increasingly be shaped by the new realities of the industry.

For example, the increasing pace of fixed asset investment in China, India, and the rest of the emerging market world is expected to increase the steel industry's annual demand for raw materials by 40% over today's levels by 2015, according to World Steel Dynamics, a leading steel-industry consultancy. Given this expected surge in demand, the prices of raw materials are unlikely to decline in the near future, making raw material self-sufficiency a priority for steelmakers.

EMERGING ACQUISITIONS. In recent years, the epicenter of the world steel industry has moved from developed markets such as the U.S., Western Europe, and Japan, toward emerging markets such as China, India, Eastern Europe, and Brazil. These developing economies often provide steelmakers with access to low-cost labor, close geographic proximity to raw materials, and fast-growing domestic markets, features that are often unavailable in mature markets.

That's why many major steelmakers are willing to pay significant premiums to establish a presence in these regions. Since the beginning of 2005, the three major emerging-market steel companies that have been acquired were all the subject of intense bidding wars among major steelmakers and ended up fetching record premiums from the eventual winners.

Although the steel industry is currently experiencing a strong pricing environment, it has previously been prone to boom/bust cycles that have destroyed a great deal of shareholder value. The most recent such pricing "death spiral" occurred in 2000-03, a period that saw over 50 U.S. steel companies file for bankruptcy.

MOVE TO QUALITY. Given the prior volatility of steel prices, the major companies are seeking to establish a stronger presence in high value-added product segments such as automotive steel, which are less prone to competition from commodity products and enjoy greater price stability.

The intense bidding war between Arcelor and ThyssenKrupp for control of Dofasco, a Canadian steelmaker with a prominent position in the North American automotive steel sector, showed the priority that companies place on gaining access to these higher quality, higher margin products.

While the goal of higher and more stable prices is obviously desirable for the steel industry, it may put more pressure on the industry's customers, who will have to contend with these higher prices. This will likely lead to steel buyers passing price increases down the line, ultimately to consumers.

The formation of Arcelor-Mittal serves as the beginning—not the end—of the consolidation movement within the global steel industry. I expect that within five years, what has traditionally been a fragmented sector will feature about half a dozen superpowers bringing a new discipline, stability, and profitability to the industry.

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