Iron Ore and Steel: A Case Study of the Economic Causes and Consequences of Vertical Integration

Abstract

FUEL, water, and iron ore are the most important inputs used in the production of pig iron; pig iron is the most important input used in the production of steel. Because of the high transportation costs, before I830 American pig iron producers found it most profitable to locate where these three inputs existed in conjunction.1 At this time successful pig iron firms were small, sold their product in narrow geographical markets, and produced for their own use most of the necessary raw material inputs. After i 830, as anthracite coal became an economical fuel, as huge geographically concentrated deposits of iron ore were discovered and developed in areas far away from the nation's major population centers, and as the nation's internal transportation improved, sharply increased scale economies arose in the production of both of pig iron's principal mineral inputs. At the same time, the scale economics of pig iron production were increasing at a much slower rate. Thus, most successful pig iron producers began to realize diminishing profits in the production of both iron ore and fuel. Hence, they began to find that it was more profitable to buy both mineral inputs in the market. This realization led to a trend toward less backward integration by pig iron producers (and their successors, the crude steel producers) that continued unabated until the mid-I8gos. Between I896 and I900 more than two-thirds of the total iron ore consumed in the United States came from mines located in the Lake Superior region. In I896 more than one hundred companies were located in this region, and they produced 9,669,000 tons of iron ore. Twenty-six of these companies produced at least Ioo,ooo tons of iron ore and five produced more than 400,000 tons. The combined output of the five largest firms totalled 3,I30,000 tons and the largest (the Minnesota Iron Ore Company) produced almost goo,ooo tons. Only one of these five companies (the Oliver Iron Mining Company) was owned by a steel producer.2 The total iron ore output of the Lake Superior region soared to