There were rumors on Friday that US Steel (X) was a target for acquisition by Russia’s OAO Severstal and a group of Russian ore producers. Regardless of whether the source (Russia’s Kommersant newspaper) or the story is credible, US Steel’s shares surged $6, or 9% and the rest of the steel sector got a boost. It couldn’t have come at a better time for anyone who was long steel stocks. Before Friday, the charts showed US Steel and many other steel stocks bending over and unless this M&A hype holds, I suspect that they will decline anyway.

If the rumor eventually turns out to be true and not just a confusion between US Steel and OS (Oregon) Steel, I see it as one of the most IRONic (get it?) and emblematic stories of global competitiveness and simultaneously, protectionism. It will certainly test the Republican-led fearmongering that Democrat protectionists will hurt the US stock markets. I am always extremely concerned about any restraint of free trade, but as it relates to steel, Republicans and specifically, the current administration have been hypocrites.

In March 2002, President Bush signed a steel deal that imposed tariffs as high as 30% on imported steel and infuriated key US trade partners such as South Korea, the European Union, and Japan. As odd as this was, it was not the first time that a Republican was a steel protectionist. President Ronald Reagan pressured South Korea, Japan and other countries to implement voluntary export restraints on steel (and automobiles) in the mid-1980s. Stranger still was the fact that President Bush’s 2002 action was taken largely due to alleged dumping that occured in the 90’s during President Clinton’s tenure and despite Clinton’s election promises to protect to the unions and steelworkers. Even Senator Byrd (D) - W. Virginia said, “This administration would rather stand aside to help save jobs in Asia while American jobs drown in a sea of cheap steel from abroad. This administration (Clinton) stands aside while foreign steel floods into this country and washes away families and communities.” Whether it was dumping or the impact of a strong dollar, it was estimated that 20,000 steel workers across the country lost their jobs in the 90’s. Leo Gerard, president of the United Steelworkers of America union in 2002, cheered Bush’s action and said “It’s not as comprehensive as we had hoped, but it certainly is the first time we’ve seen some light at the end of a long, dark tunnel.” Republicans (Reagan and Bush) being protectionist, Democrats (Clinton) not being protectionist, Senator Byrd criticizing a Democrat president, unions applauding a Republican president…. when it comes to steel, things are all mixed up!

Clinton’s inaction did not cause the problem - that happened since the late 1960s where the domestic integrated steel sector obtained trade protection in the form of quota systems, anti-dumping practices, and other protectionist devices. These schemes kept steel prices in the US higher than the rest of the world and came at a great cost as well. US steel producers lost their competitive advantage with the international players who produced higher quality steel at lower prices. It was easy to blame imports in the 90’s, but the real problem had been forming for decades of protectionism and now that China and other emerging markets have an insatiable demand for steel, we are facing the consequences.

First, it was Arcelor buying Dofasco and then last year, Mittal made a play for Arcelor and there was a concerted effort by the governments of France, Spain and other members of the EU to block it -another form of protectionism. Then there was a rumor that Arcelor would try to buy US Steel to impede Mittal’s efforts. Once that rumor was quashed, a new one started with US Steel supposedly looking at AK Steel. Last week it was Severstal buying US Steel and today its Evraz buying Oregon Steel and CNS trying to outbid Tata for Corus. Well, you get the picture. It appears that competition on a global scale requires getting as big and efficient as you can, not living in the bubble of US protectionism. The world’s steel market is being dominated by a few companies and I think the list is a few mergers away from being done.

The question is whether the US and our protectionist politicians (on both sides!) will be able to handle an acquisition of US Steel. Just consider the name and wonder how people could allow the image of a Russian company owning an American institution. When you think of the industrialization of America, it’s hard to avoid the image of workers in US steel mills. I didn’t notice opposition to Mittal’s purchase of International Steel in 2004, but that was a different case since Wilbur Ross had saved the pieces from the scrapheep of steel. We had a problem with CNOOC trying to buy Unocal and that was nothing compared to the significance of this deal. It’s going to be tough if a foreign steel producer makes a bid, and it will test our political leadership. In my opinion, the history of steel protectionism has put us into this situation and it will not save us going forward.