Steel's Staring Contest

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Over the past few months, I have written several times about the amazing profits being racked up by some (but not all) of America's steel companies. Firms such as Reliance Steel (NYSE: RS) and Nucor (NYSE: NUE) have been posting impressive revenue and earnings increases recently. While not all their peers have done so well, the trend has certainly been a positive one for steel producers and their shareholders.

In fact, some of these companies have felt so much in control of their destiny that they threw caution to the wind and risked the ire of America's famously litigious corporate citizens by imposing surcharges on their products. This, even when their supply contracts with their customers clearly specified set prices for their goods.

Big mistake. Huge mistake.

So learned Dutch steel maker Ispat International's (NYSE: IST) Chicago subsidiary, Ispat Inland, last week, when a Michigan circuit court judge imposed a temporary restraining order (TRO) on the company's attempts to impose surcharges on sales of steel to Whirlpool (NYSE: WHR). For Whirlpool, winning a TRO is not the same thing as winning its lawsuit -- that will not be decided until June. But it is, at least, a sign that Whirlpool has a legal leg to stand on, and suggests that Whirlpool will more likely than not be the victor in this legal war.

Moreover, Whirlpool's TRO win bodes ill for two companies imposing similar surcharges on steel and steel parts supplied to General Motors (NYSE: GM): Steel Dynamics (Nasdaq: STLD) and Textron (NYSE: TXT). GM sued both companies over their surcharges recently in Oakland County, Mich. While the Whirlpool lawsuit was filed in a different county, judges in the GM lawsuits will be deciding their issues based on the same Michigan case law that guided the judge in the Whirlpool matter.

Were I a betting man, I would be placing my money on both Whirlpool and GM being the ultimate winners in their respective lawsuits. As for the losers, those would include not just Steel Dynamics, Textron, and Ispat, but all the other steel makers (and shareholders in those steel makers) currently signed to supply contracts. They would be forced by court judgments, or fear of court judgments, to drop their surcharges and excess profits and agree to be compensated at the previously agreed rates.

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Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.