The United States, Britain and Germany were once the kings of steel, dominating worldwide production. They were dethroned by Japan in the 1970s. There’s about to be a new king...China.

China currently consumes and produces 25% of world steel output. In 2003, when the U.S. chose to end imposed tariffs on imported steel, instead of decreasing the price of steel, as theory would suggest, prices soared, thanks to Chinese demand for the good. Prices increased for hot-rolled coil sheets from $200 per ton to over $600 per ton.

Chinese production was only 11% of the world’s total in 1994; today it stands at 25%. As a result, Chinese production drives prices significantly one way or another. When China began selling more steel abroad than it was importing, prices on the world market plummeted by 25%. As it began importing steel on a net basis, prices increased. International steel firms—and prices--began to be swayed by what Chinese firms did.

This is bringing about a wave of industry mergers internationally. Experts agree that the industry will soon be dominated by a few large firms, each capable of producing 100 million tons of steel annually (which is what the top two firms currently do, combined). Steel mills have long been an example of economies of scale for economists.

Is China’s activity here a bad thing? It may be for some international firms. China’s domestic market shows significant over-capacity in the steel market, dropping the internal price of Chinese steel to about $300 per ton. This is significantly below the world steel price, making Chinese steel exports an attractive option. And production is growing. China is building four steel plants on their eastern coast, and by 2010 will be able to double national output. But this will only serve to depress the price of steel worldwide.