A characteristic feature of the world's industrially developed economies is the existence of huge and integrated corporations that account for large proportions of the industrial output and GDP in their countries.

In different countries, integration takes different forms, depending on the state of the economy and its development, national peculiarities and anti-monopoly laws in effect, but the essence remains the same. Integrated structures can exist in various forms, such as financial-industrial groups, holding companies, conglomerates, etc., but the form of ownership and the tasks are basically unchanged.

Characteristic features of foreign integrated structures include the existence of strong and durable industrial ties within a group and a broad diversification of activities, combined with the narrow specialization of each subsidiary or affiliate. Therefore, conglomerates as a whole embrace a broad range of activities, including production, sales, services, finance, innovation and social activities.

In the 1990s, integrated corporations started to develop into transnational ones. This process gained momentum through mergers, acquisitions and alliances with the aim of consolidating positions on markets worldwide.

In other words, the world's steel industry experienced globalization in the late 1990s, which received an additional impetus from increased competition, the deceleration of the industry's growth rate and the reduction of prices for steel-industry products. Other contributing factors included reduction of transportation and communication costs, liberalization of tariffs, growth of direct foreign investments and technical progress.

A strategic alliance represents a different form of globalization, in which several companies do not merge but seal agreements to cooperate on certain markets, exchange technologies and carry out joint research.

As it is not limited to the steel industry, globalization has affected many other sectors, including the major consumers of steel and steel articles. As things stand today, the machine-building industry is effectively controlled by some 50 major industrial groups, while in the steel industry 10 giants control 25 percent of the market.

Globalization dictates increased performance requirements for metal producers, including:

• Guaranteed uninterrupted supply to all the client's subsidiaries and affiliates in all regions;

• Delivery of products in a full variety in accordance with customer specifications and in strict compliance with the customer's quality standards, including packing and terms of delivery; and

• Technological and technical services.

Needless to say, only large transnational companies that have resources, production facilities, branched sale and delivery networks and great financial and research potentials are able to meet these requirements.

The current situation in the Russian steel industry is prompting owners and managers to look for new forms of integration, consolidation of ties and other ways to boost the competitiveness of their products and expand into the domestic and global markets.

Russia's steel industry is characterized by an extremely high degree of concentration: Nine metallurgical combines account for nearly 90 percent of the country's steel output, while the remaining two dozen account for the rest. Since privatization, the major metallurgical combines had been vertically integrated structures, i.e. they embrace the whole production cycle – from coke and agglomerate to sophisticated articles of rolled steel.

The most important trends in the industry include the restoration and consolidation of the traditional ties with the ore-mining and coke industries and the mergers of smaller metallurgical combines under the umbrella of the financial-industrial groups. Interestingly, not vertical, but horizontal integration has been prevalent.

The United Metallurgical Co. began to form during the time of the so-called "voucher auctions" (1992-93) and currently includes the metallurgical plants ChusMZ, Vyksunsky MZ, Shchelkovo MZ, Chelyabinsk TPZ and Gubakhinsky KKhZ and a number of other factories. Currently, the company is consolidating itself through share exchange and cross-ownership. Thus, Chelyabinsk TPZ will receive shares in the group's other members in exchange for a parcel of its shares, which will be transferred to the holding.

The MDM Group appeared much later, and, replacing the previous owners of the Volzhsk Tube Factory (which used to belong to the Menatep bank), Seversk Tube Factory (which used to belong to MAIR) and Kuznetsk Ferroalloys (which used to belong to Interros), has formed the horizontally integrated holding Tube Metallurgical Co. (TMK).

Since 1999, both vertical integration (around large combines) and horizontal integration (through common ownership of shares) processes have been under way in the Russian steel industry. Vertical integration has been particularly noticeable with Severstal, NLMK (Novolipetsk Iron and Steel Works) and MMK (Magnitogorsk Iron and Steel Works), while horizontal integration has been characteristic of ZSMK (West-Siberian Iron and Steel Works), KMK (Kuznetsk Iron and Steel Works) and NTMK (Nizhny Tagil Iron and Steel Works). A characteristic feature of integration in the Russian steel industry is that it occurs mostly in the form of "common-law marriage," i.e. without a formal merger of capital or transition to a common balance.

As things stand today, the industry's biggest holding is Severstal. It holds stakes in Olenegorsky GOK, Karelsky Okatysh, the Cherepovets Steel-Rolling Mill, the Kolomenskoye diesel-locomotive factory, the Ulyanovsk automotive factory and the Zavolzhsk engine factory.

After having spent a lot of time and effort to create the Magnitogorsk Steel financial-industrial group, Magnitogorsk Iron and Steel Works left the group in May 2000 and has since then been trying to form a holding company with the group's other members.

The holding formed on the basis of Novolipetsk Iron and Steel Works is expanding slowly, but steadily.

A special place in the Russian steel industry's integration process belongs to Evrazholding, which controls the Nizhny Tagil Iron and Steel Works and takes part in the management of the Kuznetsk Iron and Steel Works and the West-Siberian Iron and Steel Works. It is expected that a major holding will be formed in the future on the basis of the latter three metallurgical combines. Meanwhile, Evrazholding has announced its intention to form an alliance with Novolipetsk Iron and Steel Works.

Another example of integration is the mutually beneficial partnership between Severstal and United Metallurgical Co.

Looking ahead to the period up to the year 2010, major changes are expected in the industry's organizational structure through the formation of a limited number of integrated financial-industrial groups that will control their own and related enterprises. Such control may be enforced through shareholding, partnership agreements or loan agreements.

Finally, it has to be noted that success in the development of such integrated structures will depend on legislative progress, specifically in the fields of anti-monopoly regulation, privatization, banking and taxation.

(The author is deputy director of the Institute of Economics at the Bardin Research Institute of the Ferrous-Metals Industry.)