NEW YORK AND TORONTO —

Employees at Algoma Steel Inc. have seen some tough times. Twice in the past decade, the Sault Ste. Marie, Ont.-based steel maker has claimed court protection from creditors. Just 18 months ago, it laid off 600 people, roughly one-fifth of its work force. But last July, the remaining Algoma workers reaped the rewards of retrenchment. Flush with cash from booming steel prices -- up 21/2 times from 2003 levels -- the company distributed profit-sharing cheques worth up to $10,000 each to every one of its 3,000 employees.

Algoma is hardly the only manufacturer enjoying the boom. Fuelled by rising demand, especially in China, and made leaner through aggressive cost cutting in the hard times, steel companies across North America -- indeed, around the world -- have enjoyed record prices and profits this year.

But for Algoma, the bounty brings its own dangers. Small by global standards, the company has become a fat target for predatory investors who, tempted by its swelling cash hoard, could either run the company or find an international buyer for its efficient mills. Earlier this week, Algoma took defensive action -- announcing a shareholder rights plan designed to thwart anyone from gaining control at bargain prices.

In an interview, Algoma's chief executive officer Denis Turcotte said he wasn't responding to any specific takeover bid, but to the new drive for consolidation in the international steel industry. "We want to make sure that if this company is going to be bought, we maximize shareholder value, plain and simple," he said.

Mr. Turcotte knows what every industry executive knows: There are just too many steel companies in the world. And while strong demand is making them profitable, it won't slow the momentum of the rationalization that will fundamentally alter the steel-making landscape. In fact, many analysts believe that over time, the industry will eventually amalgamate into a dozen or so global behemoths -- much as the auto and pharmaceutical industries have done.

The challenge for any steel company, of course, is to decide whether to eat or be eaten. The alternative is to go it alone in a global market, which, according to most analysts and industry executives, will require firms to have international scale and scope to survive the inevitable cycles.

The aim of consolidation is to put steel companies on a more competitive footing with their raw material suppliers -- oligopolistic purveyors of iron ore, coal and electricity -- and to gain some pricing power over their own customers.

One example of the trend: Russian steel maker OAO Severstal is now vying with Germany's Deutsche Bank AG and, potentially, other bidders for control of Hamilton's Stelco Inc. Just 10 months ago, Canada's largest steel producer sought protection from creditors, amid fears it was running out of cash. Today, while it remains under the bankruptcy umbrella, it is highly profitable and a sought-after asset.

The industry "needs far more consolidation," Thomas Veraszto, Severstal's deputy general director, said in an interview in Toronto, where he's leading the Russian steel giant's effort to buy Stelco.

At the moment, the steel industry's fragmented nature means manufacturers are squeezed at both ends, suppliers and buyers. Three major players dominate the global iron ore market and can exercise powerful pricing leverage over their steel maker customers.

And while auto makers -- the key end customer for the steel companies -- constitute less of an oligopoly than iron ore, the industry remains heavily concentrated. The Detroit-based Big Three, for example, hold almost 60 per cent of the North American market, enabling them to pressure steel makers to keep prices low.

"We have to make this playing field level," Mr. Veraszto insists, "and have a fair relationship between the steel industry and its customers."

David Sutherland, CEO of Regina-based Ipsco Inc. and current chairman of the American Iron and Steel Institute, says steel companies -- and their employees -- are deluding themselves if they think they can avoid internal restructuring simply because the market is suddenly overheated.

"For some of these companies," he said in an interview, "this recovery came six months too soon. There are clearly some companies out there who, while everyone is making a dime today, are going to be very challenged across the cycle if they don't find a way of becoming more competitive."

Mr. Sutherland said the major world players are determined to gain pricing power and to lower their costs through acquisitions. Within the next two decades, he expects, the world market will be dominated by six to 12 global firms, compared with dozens today.Already, the pace of international mergers is quickening. Last month, the British-based Mittal family and New York financier Wilbur Ross announced a bold move to merge their assets, creating the world's largest steel company, with 57 million tonnes of output a year and projected revenue of more than $31-billion (U.S