A big question hangs over the US steel market in the wake of Cleveland-Cliffs’ $1.4-billion acquisition of ArcelorMittal USA, according to industry analysts and market participants: What is it going to do with the new assets?
Fastmarkets AMM
October 14, 2020
By Robert England
As a result of the deal, first announced in late September, Cleveland-Cliffs will become North America’s largest flat-rolled steel producer overnight, owning mills that shipped 17 million net tons in 2019. The deal also will make Cleveland-Cliffs the largest iron ore pellet producer in North America, with 28 million long tons of annual capacity; that volume accounts for more than half the ore produced in the United States in 2019, according to the US Geological Survey.
That position will give Lourenco Goncalves, the chairman, president and chief executive officer of Cleveland-Cliffs, a lot of options to potentially reshape the steel industry in the United States, market participants said.
“The real question is: Will [Goncalves] take the idled blast furnaces at Indiana Harbor, Burns Harbor and Cleveland and start them up for hot-rolled coil?” one service center source from the Mid-South asked, noting that if those furnaces are restarted, it would increase supply and put downward pressure on prices.
“If, instead, he converts them to make pig iron, capacity constraints in the industry will remain,” the Mid-South service center source said.
Fastmarkets’ daily steel hot-rolled coil index, fob mill US was calculated at $32.50 per hundredweight ($650 per short ton) on Tuesday October 13, its highest point since late April 2019, supported by lengthening lead times and tight supply.
Notably, during a conference call to discuss the acquisition, Goncalves said that the company had the option of becoming “a meaningful future supplier of merchant pig iron.”
But other market sources were skeptical about Cleveland-Cliffs making any dramatic moves that would affect either the supply or the price of steel.
“Cliffs is a wildcard – didn’t do a whole lot with AK [Steel],” a source at a Gulf Coast steel consumer said. Still, “consolidation is usually pretty good for the market. This has some stability to it,” he added.
Cleveland-Cliffs closed its $1.1-billion acquisition of AK Steel in March.
There is also the question of what ArcelorMittal SA might do to expand operations in the United States via its remaining modern mill assets in North America, one Midwestern distributor source said.
Representatives for ArcelorMittal did not provide Fastmarkets with additional comment by the time of publication.
Those assets include steels mills in Canada and Mexico, as well as an electric-arc furnace (EAF) facility in Calvert, Alabama, which is a 50:50 joint venture with Japan’s Nippon Steel Corp.
“They kept the three best pieces in North America,” the Midwest distributor source said.
The joint venture in Calvert “could churn out capacity,” in an effort to retain some of the customers the steelmaker lost in selling ArcelorMittal USA, the Midwest distributor source said. “The problem they have is that most of the marketplace for their goods is miles away [in the US Midwest]. So, while the price is good, the freight is bad, in terms of shipping [to Midwest steel distributors and consumers] from Alabama.”
And a Gulf Coast steel fabricator source reported that production volume has fallen at the Calvert plant.
“AM/NS in Calvert is really hurting due to the slab [import] restrictions for [the fourth quarter of 2020],” that source said.
ArcelorMittal’s Dofasco operations in Canada – that nation’s largest steel mill – are another potential source of steel for distributors and consumers in the United States, according to the Midwest distributor source. If operations there ramp up, the additional output could potentially weaken prices.
Objectives, opportunities
As for what inspired the acquisition, Cleveland-Cliffs’ decision likely was driven by “a defensive strategy of buying up their customers,” according to Keybanc Capital Markets analyst Philip Gibbs.
If, for example, ArcelorMittal’s integrated mills were to fail, that would have a knock-on effect on Cleveland-Cliffs’ business.
The thinking at Cleveland-Cliffs was likely along these lines, Gibbs explained: “We are already seeing our customers on the integrated side under pressure, and we can’t bear the risk of losing them.”
The ArcelorMittal USA and AK Steel acquisitions effectively give Cleveland-Cliffs captive buyers of iron ore, ensuring future sales.
“So, it makes them fully integrated,” Gibbs said, adding that Cleveland-Cliffs’ need to sell its iron ore supply will deter the company from idling its newly acquired integrated mills.
“They will be able to strategize and work on a market plan that is geographically favorable and product favorable. They can help each other out,” the Midwest distributor source said of the iron ore and integrated steel businesses. For example, Cleveland-Cliffs could place steel orders with AK Steel or ArcelorMittal USA, meaning that it will have more options for time-sensitive deals.
“[Goncalves’] goal is to make sure neither one fails,” that source said.
Gibbs also indicated that Cleveland-Cliffs might repurpose some of the ArcelorMittal blast furnaces making pig iron.
“There is going to be a material deficiency of pig iron in the market over the next few years” as EAF mills continue to expand capacity and production levels, he said. “They are going to need a lot of pig, and a lot of pig we don’t have in this country.”
New, restarted capacity?
Cleveland-Cliffs also might ramp up operations at its integrated mills to gain market share, according to market participants.
That’s a choice that could prove risky.
“It could backfire full time if [ArcelorMittal USA also] churns out more volume, cutting prices all over to get business,” the Midwest distributor source said.
Cleveland-Cliffs has said it will not invest in the integrated mills to improve operations, but will allocate $250-350 million in capital spending on them. That “is in line with their [current spending on] maintenance levels,” Gibbs noted.
The ArcelorMittal USA mills were “barely cash-flow positive in 2019,” according to Gibbs said. By his estimate, ArcelorMittal made $60-100 per ton with its other assets, while the US assets earned closer to $30 per ton, representing 15% of the company’s steel output but only 10% of steel profits.
To address concerns about the new assets’ profitability, Goncalves argued that the integrated mills and the iron ore operations will work far better together than as individual pieces. In particular, as a result of the consolidation, Cleveland-Cliffs can save $150 million by eliminating redundancies and optimizing logistics, Goncalves said during a September 28 conference call.
Cleveland-Cliffs did not respond to Fastmarkets’ requests for additional comment about the deal.
But whatever strategy the steelmaker takes with its new assets, market participants agreed that Cleveland-Cliffs will have considerable sway over the steel market.
The company “will have the upper hand for a while,” the Midwest distributor source said. “If they play it smart, they can work the situation out with the rest of the market, which will look different than it does today, I think.”
