According to the Ernst & Young Global Steel Report 2012, in the first nine months of 2011, six steelmakers spent $US833 million ($A799.8 million) investing in iron ore and coal interests.

The largest was the $541 million acquisition of Baffinland Iron Mines Corp by ArcelorMittal and Nunavut Iron Acquisition Co.

Moving upstream is one way steelmakers can gain more control over costs.

“Steelmakers with a strategy of owning the mines that feed their mills are far more competitive,” E&Y said.

“The mills that have relied on miners to provide their feedstock are now focused on acquiring or are considering acquiring mines or stakes in mines to secure raw materials at a more competitive price.”

E&Y expects the trend to continue, with a number of local deals in progress.

Russia’s Magnitogorsk Iron and Steel Works (MMK) has made a $554 million takeover offer for Pilbara developer Flinders Mines, while local steelmaker OneSteel has agreed to acquire WPG Resources’ South Australian iron ore projects for $320 million.

However, E&Y warned it was a significant risk for steelmakers to add a mining business due to the additional capital investment required, infrastructure investment, geographical challenges, labour pressures, different management requirements and the separation of the two businesses.

One way to reduce the risk and costs is to enter a joint venture arrangement.

“The current trend among steel companies has been to reduce costs by entering into joint ventures,” E&Y partner Sangwook Cho said.

“This way the cost is shared between the parties, creating economies of scale, as are technological advances that usually reduce the cost base.”

E&Y’s report also warns steelmakers of the competition for resources.

Last year there was an estimated $US30 billion in coal deals completed, up from $17.9 billion in 2010.

“This activity was driven primarily by major coal mining companies looking to boost production capacity to meet increasing demand from China and India,” E&Y said.

“Larger power utilities and some steel companies, often with government backing, are integrating into raw materials to manage volatility and long-term security of supply.”

Meanwhile, E&Y has maintained a cautious outlook for the steel industry in 2012, with overcapacity a big issue.

However, the global steel industry is still expected to grow at a compound annual growth rate of 2.6% by 2015, with 6.7% growth this year.