Almost every North American steel stock has soared in the past few weeks as investors gamble a fresh round of takeover deals is in prospect.

Part of the advance can be explained by a decade of fundamental changes that have reinvigorated this once-struggling industry.

The notoriously volatile steel cycle also appears to be on the up this year.

As a result, the S&P500 steel index, for example, is up 30 per cent this year; against less than 2 per cent for the S&P as a whole.

With continuing rapid consolidation, such tailwinds mean many steel companies may struggle to keep their independence for long.

"There is meaningful premium in most if not all steel stocks because of takeover speculation," said Robert Miller, senior managing director of Miller Mathis, an investment bank that specialises in the steel industry.

But a handful of groups with less to offer a new owner have also risen with the tide, receiving a boost that is harder to justify.

"The market paints with a broad brush and people may not have dug down deep and thought about why anyone would want to buy some of these companies in the first place," Mr Miller said.

Yet he argues that, overall, the logic of steel industry consolidation has been compelling. US Steel's $2.1bn bid to buy Lone Star Technologies last month was the most recent example of a series of transactions that has remade the industry.

In the last three years, deals worth a total of more than $25bn have been struck, according to Capital IQ. Only three groups now account for more than two-thirds of US steel production; up from a quarter in 2003.

The bigger groups have more power in their relationships with suppliers and customers as well as greater control over capacity. That has helped temper the severe cycles that have scared investors away in the past.

Valuations have been rising as the demand for acquisitions increases. US Steel's offer values Lone Star at 8.5 times earnings before interest, tax, depreciation and amortisation. That is equal to or higher than other recent transactions, reflecting the desirability of owning a maker of value-added products such as tubular steel and Lone Star's position as the last remaining US independent.

After the offer, the spotlight quickly turned to IPSCO, a Canada-based tubular steelmaker many analysts regard as a stronger company than Lone Star.

Shares in IPSCO increased by more than 10 per cent after the Lone Star deal was announced.

Among other groups, analysts have also identified Steel Dynamics as an attractive "bite-size" acquisition target. They say the group has strong margins and growth prospects, yet trades at a discount to the sector.

By contrast, some analysts suggest big groups such as US Steel and Nucor may be less deserving of the lift their shares have experienced at takeover rumours.

Buyers would have little opportunity to capitalise on further integration or a turnround and the price would be hefty.

"We believe some 'The Russians Are Coming' anticipation in the market propelled shares [in US Steel] upward," said Ms Tanners. "Yet we do not believe US Steel is an acquisition target at current valuation."

Hopeful investors may also be overlooking legacy issues such as pensions and healthcare liabilities.

In the event, better trading conditions may offset any disappointment about take-over bids failing to materialise.

Aldo Mazzaferro, analyst at Goldman Sachs, argues that rising US steel prices and declining imports will help steel sector stock performance regardless of further consolidation.

"This is really a supply-side story, in that the fall in imports has really had an extremely positive effect," said Mr Mazzaferro.

"It will really show through in some higher-than-expected earnings."

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