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For the last decade, much of the West's steel industry has been in the doldrums. Sinking prices and flat demand, rising costs and competition from Asia turned steel belts into rust belts as once-mighty American titans like LTV and Bethlehem Steel went belly up. Many of Europe's former communist bloc governments determinedly sold off their dilapidated, money-losing steel mills. Workers around the globe were bounced out of the devilishly cyclical industry in droves. Even bosses were shying away: in 1998, Michael Frenzel, then chairman of German industrial concern Preussag, became so fed up with the smokestack rollercoaster that he embarked on a program to transform Preussag — now TUI — into a travel firm, selling off the company's steel mills.

But the industry is gleaming today. Prices are running at 20-year highs, driven by strong demand from a booming China, which is expected to grab up to one-third of steel produced this year for infrastructure and other projects. Last year, estimated global crude steel consumption reached 976,000 metric tons, up 6% from the previous year and 15% from three years earlier. Last month, the $4.02 billion Anglo-Dutch steel producer Corus recorded its first half-yearly profits since its formation five years ago. "We're keeping our feet on the ground," said chief executive Philippe Varin. But "we expect further progress in margin and profit in the second half, based on the improving global fundamentals and restructuring program."

All of which sets the stage for a new round of global consolidation in the industry. Last week, in a complicated $17.8 billion deal, Indian entrepreneur Lakshmi Mittal said he would merge his existing steel assets — the privately-held LNM Holdings and the publicly-traded Ispat International — with the U.S.-based International Steel Group (ISG). The deal, which must still gain regulatory approval, would create the world's biggest steel company, Mittal Steel, to be based in Rotterdam in the Netherlands, and help Mittal pursue his modest goal of making Mittal as synonymous with steel as Ford is with the motor car. The new company could produce up to 10% of the world's steel and, as Mittal predicts, will "dramatically change the landscape of the global steel industry. [It] provides Mittal Steel with a more significant presence in important industrialized economies such as those in North America and Europe, and in economies that are expected to experience above-average growth in steel consumption, including Asia and Africa."

Mittal's move is the boldest in a series of M&A maneuvers that steel producers hope will help them thrive. According to its owners, the industry's problem was that too many providers made prices too competitive and profits impossible. For example, the world's Top 10 steelmakers supply less than one-third of all steel produced; by comparison, the world's Top 10 automakers have more than 90% of the global auto market. Historically, especially in the U.S., automakers have been able to play off one mill against another to secure lower prices.

Thus mergers have proliferated: Luxembourg-based Arcelor, currently the world's largest steel producer, was formed in 2002 through the merger of steel companies in Luxembourg, Spain and France. Corus emerged from the 1999 union of British Steel and Dutch firm Hoogovens. In order for steelmakers to wield sufficient clout, notes Tommy Trask, an analyst at Standard & Poor's, steel "needs to be as consolidated as the iron-ore suppliers or the end customers." Both Mittal and Wilbur Ross, the former investment banker and distressed investment specialist who helped create ISG, envisage a future where steel is dominated by as few as half a dozen multinational companies. "Because of the scale of the transaction," Ross told Time, "it will accelerate [the merger trend]. It's inevitable."

It's a grand vision, though not without risk. In a series of shrewd moves that netted him an estimated $22 billion fortune and the nickname "the Carnegie of Calcutta," Mittal, 54, has spent much of his career buying run-down steel facilities in far-flung locations like Romania and Kazakhstan and returning them to profitability. But ISG is a different animal. It was formed in 2002 from the guts of the bankrupt LTV steel business. Under the watchful eye of Ross, the firm, which employs 15,000 people, grew into one of the U.S.'s major steel producers by acquiring money-losers like Acme Steel and Bethlehem Steel. (In the planned new entity, Ross will get seats on the board of both the Dutch company and its U.S. subsidiary, a strategic advisory role — and cash and shares valued at $267 million.)

ISG also got a major boost from the United Steel Workers of America union (uswa), which made major contract concessions to Ross to help get the business underway. So far, uswa seems to view Mittal's move as positive. Says union president Leo Gerrard: "Larger, stronger steel companies benefit our members and retirees." And outside analysts see a good fit between Mittal's surfeit of raw materials and ISG's demand for them. Raju Daswani, head of research at industry analysis firm Metal Bulletin Research, says: "Mittal [has] a lot of raw material production, but not much exposure to the high-end value of the chain. ISG needs a supplier of raw materials."

So the future's bright for the men of steel, right? Maybe not for long. After all, cyclical industries like steel are, well, cyclical. Sure, the economic boom in China is currently driving up steel demand — and prices. But how sustainable is that boom? Many observers still believe that prices will fall as a result of the World Trade Organization move that forced the U.S. in December 2003 to drop tariffs it had introduced in 2002, though that market effect has yet to emerge. Dropping prices could make it harder for Mittal to service its estimated debt of $3.2 billion. At the moment, China is devouring raw material, which may cause a nasty glut when the steel pendulum starts to swing back the other way. And, notes Standard & Poor's Trask, "the new steelmaking capacity in China will eventually catch up with the growth in that region." China's steel output reached 192 million tons through September of this year, up more than 20% from 2003. In the long term, that could mean even more Western overcapacity in the lean years — exactly the kind of situation that made companies like TUI shy away from steel in the first place.

Does this mean that in five years, the new class of big firms like Corus, Arcelor and Mittal will want to walk away? Not likely. In the short term, there is money to be made. And by mere virtue of their size, giants like Mittal should also be well-placed to ride out the industry's next dip. The new group will have "enough economies of scale to ride out the downward part of the cycle," says Daswani. "No-one sits pretty in a downturn. But it's the small and medium-sized companies who get squeezed first." Maybe so, but survival in an industry as tough and turbulent as this one takes nerves of steel.

• JENNIE JAMES
• Steel springs back in the West