U.S. steel producers catapulted out of a lengthy depression last year as the star-crossed industry's stars aligned themselves like never before.

Alyssa Cwanger, Post-Gazette Harry Page, left, vice president of engineering, technology, and metallurgy for Wheeling Pittsburgh Steel, and Jim Bradley, chairman, president, and CEO, look over the company's new $170 million steelmaking furnace at the Mingo Junction plant in Ohio. Click photo for larger image. Trends to Watch in 2005 One in a series Previous coverage Retailers hope to meet modest holiday sales goals (12/28/04) Retailers hope to meet modest holiday sales goals (12/27/04)

The fruits of restructuring and consolidation, surging demand from China, the strengthening economy and a weaker U.S. dollar were the leading reasons for steel's rebound. Analysts expect the prosperity streak to continue in 2005. But it's still an industry in which clouds are always on the horizon, and next year is no exception.

"If the dollar remains weak and China doesn't collapse, the steel business should have a strong 2005," said Charles Bradford of Bradford Research.

The roots of the rebound were sown three years ago, when much of the industry languished in or near bankruptcy, besieged by cheap imports, slack demand and high costs. Bethlehem Steel, LTV Steel, National Steel and other producers shed billions of dollars in pension and retiree health-care costs in bankruptcy, making them more attractive targets for competitors healthy enough to acquire and resurrect them.

Industry leaders International Steel Group, Nucor and Pittsburgh-based U.S. Steel purchased nearly a dozen of their sick sisters and slashed union and management ranks. U.S. Steel reduced its domestic work force by 20 percent and other survivors made comparable reductions. Their restructuring created larger, heathier steelmakers that exert more clout in price negotiations with major customers.

The makeover, coupled with improving economic conditions, resulted in the industry's best performance in years. Through October, shipments by U.S. mills were up 6 percent from year-ago levels, according to the American Iron and Steel Institute.

The International Iron and Steel Institute reports North American production jumped 8 percent in the first 11 months of the year vs. a 9 percent global increase.

Alyssa Cwanger, Post-Gazette Jeremy Thomas, of Richmond, Ohio, cuts steel at the Wheeling Pittsburgh Steel Corp.'s Mingo Junction plant in Ohio. Click photo for larger image.

More importantly, steel prices jumped even more. A ton of hot-rolled sheet, a commodity product, topped $750 per ton, more than double year-ago levels, according Purchasing Magazine. The magazine reports comparable increases for other types of steel.

Some of the runup was caused by customers who ordered extra early in the year out of fear they would not be able to get the steel later, even at higher prices. Companies that fabricate parts or products from steel say supply is still a concern. William Gaskin, president of the Precision Metalforming Association, says the industry group's 1,200 members report that shipments continue to arrive late. In some cases, the shipments includes less steel than they ordered, Gaskin says.

Bradford says supply concerns made the market look more robust than it really was.

"I don't think the market was ever as strong as the steel guys thought it was," he says. "There was a lot of inventory rebuilding in the first nine months. People were buying more steel than they were consuming, and that created the tight market."

Working off the inventory caused prices to dip in the fourth quarter, but some producers have already told customers they will raise prices in the first quarter. Bradford is forecasting the industry will get at least some of the increases they are seeking.

"I think we'll see a better average price than we saw in the fourth quarter, but not as good as the third quarter," he predicts. "I think the third quarter may have been the peak of the cycle."

Prices may have cooled off temporarily, but steel stocks haven't. Susquehanna International Group's new Steel Producers Index is up nearly 90 percent on the year, and shares of twice-bankrupt Wheeling-Pittsburgh Corp. advanced percent. Renewed investor interest in the Rust Belt industry prompted Wheeling-Pitt, U.S. Steel and Allegheny Technologies to market secondary offerings of their shares.

Bradford believes steel stocks already reflect next year's good news. Moreover, a number of steel companies are planning initial public stock offerings, "usually a sign of a peak," Bradford says. The industry's long-awaited consolidation is expected to continue next year, particularly in light of the benefits steelmakers have experienced from previous purchases. Analysts credit at least some of this year's price spike to the negotiating leverage producers have after making acquisitions.

Steelmakers will consider using some of the cash their mills are generating for acquisitions. However, because most of the attractive marginal players have already been purchased, the focus is expected to shift to large, healthier steelmakers. Which of them will remain independent, despite the merger binge?

One of them won't be International Steel Group, created by financier Wilbur Ross out of the rubble of Bethlehem, LTV and Weirton Steel. ISG is expected to become part of the world's largest steel producer when it merges with Mittal Steel sometime in the first quarter. Mittal's operations will span four continents, employing 165,000 in 14 countries. By comparison, No. 8 U.S. Steel is roughly a third of the size of Mittal.

That begs the question: how big is big enough? Expect at least part of the answer to that riddle in 2005.