Cliffs takes consolidating role in US steel

The world’s largest steelmaker is largely decamping from its assets in the United States more than a decade after consolidating a domestic steel industry decimated by bankruptcies.

Stepping into the role of consolidator-in-chief is Cleveland-Cliffs Inc, which a year ago didn’t have steelmaking operations and this year is slated to spend billions of dollars to scoop up mostly integrated mills across the US Midwest.

Cliffs is now poised to be the largest flat-rolled steelmaker in the US and a top supplier to the domestic automotive industry following its $1.4-billion deal to acquire ArcelorMittal USA – a figure that grows to more than $3.3 billion once assumed pension and other legacy costs are taken into account.

Cliffs – after its $1.1-billion acquisition of AK Steel Corp in March – and assuming its deal for ArcelorMittal USA is completed, will leapfrog over integrated steelmaker U.S. Steel Corp and electric-arc furnace (EAF) producer Nucor Corp to become the largest flat-rolled producer in the US.

Also noteworthy is that the deal, assuming it closes, will leave only two integrated steelmakers in the US: Cliffs and U.S. Steel.

Integrated mills use iron ore and coking coal as their primary feedstock materials, whereas EAFs – which account for the majority of steel output in the US – rely primarily on scrap.

Cliffs goes USA all the way
“The deal will make [Cliffs] the largest flat-rolled steel producer in [the] US and drive the market more toward a big four [from a big five] in terms of the carbon sheet primary steel production; this should be a general positive, all else equal,” Keybanc Capital Markets analyst Philip Gibbs wrote in an analyst note dated Monday September 28.

According to Cliffs’ figures, the “big four” flat-rolled steelmakers following the deal – and based on 2019 flat-rolled shipments – will be:

  • Cliffs: 16.5 million tons
  • Nucor: 12.7 million tons
  • U.S. Steel: 10.7 million tons
  • Steel Dynamics Inc (SDI): 7.7 million tons

On the flat-rolled steelmaking side, Cliffs will acquire the following operations in the Great Lakes region:

  • Indiana Harbor (Indiana): The largest integrated steelmaking complex in North America, with a steelmaking capacity of about 7.4 million tons per year
  • Burns Harbor (Indiana): Capacity of approximately 5 million tpy
  • Cleveland (Ohio): Capacity of approximately 3.8 million tpy
  • Riverdale (Illinois): Compact strip mill with an annual capacity of about 1 million tpy

Gibbs brushed aside potential antitrust concerns impeding the deal.

“If divestments are required from [Cliffs], we do not think it will be hugely impactful to the transaction succeeding,” he wrote.

Cliffs will also have a dominant position in the automotive market, and an even more commanding position when it comes to mining, Cowen analyst Tyler Kenyon wrote in a research note also dated Monday.

Cliffs will go from supplying approximately 18% of the US automotive sheet market to accounting for 41% of that supply once the deal for ArcelorMittal USA is closed. And it will control 61% of US blast furnace pellet capacity, with U.S. Steel accounting for the remaining 39%, Kenyon wrote.

“The purchase price appears reasonable and synergy targets conservative. The deal consolidates US carbon [and auto] sheet markets and potentially opens the door for further capacity rationalization,” he wrote.

Before its deals for AK Steel and ArcelorMittal USA, Cliffs previously was primarily an iron ore miner and blast furnace pellet supplier to the two companies, with AK Steel soaking up 6 million net tpy of pellets and AreclorMittal USA 7-10 million tpy.

The acquisition of ArcelorMittal USA is expected to increase Cliffs’ pellet shipments to 28 million net tpy, up by 40% from 20 million tpy previously, according to company figures.

And as a result of the deal, approximately 90% of Cliffs’ pellet shipments will be internal to its own operations versus only 45% before the agreement, according to figures provided by the company.

Cliffs, in other words, will be “fully self-sufficient in iron ore,” it said.

While Cliffs will remain primarily an integrated steelmaker, the transaction will more than double its EAF capacity with the acquisition of the following EAFs:

  • Coatesville (Pennsylvania): Steel plate mill, with a steelmaking capacity of about 1 million tpy
  • Steelton (Pennsylvania): Steel rail mill, with a steelmaking capacity of about 1 million tpy

The deal also increases the possibility that Cliffs will produce merchant pig iron in the future. Cliffs said in a presentation about the acquisition that its Ashland Works facility in Kentucky could be used as “a potential pig iron plant.”

The agreement will also provide Cliffs with a captive audience for production from its hot-briquetted iron (HBI) plant in Toledo, Ohio.

ArcelorMittal says goodbye, mostly, to the US
While ArcelorMittal will divest its union-represented mills and mines in the northern US, it will hold onto AM/NS Calvert, its non-union and comparatively new slab re-rolling plant in Alabama. The company has said it plans to install an EAF at the location.

And ArcelorMittal will retain a strong position in North American market, more broadly via its Dofasco flat-rolled steel mill and long product mills in Canada, its tubular products facilities and its Mexican subsidiary – ArcelorMittal Mexico. The steelmaker will also hold onto its research and development facilities, according to a presentation released on Monday.

“The transaction represents a significant repositioning of [ArcelorMittal’s North American] footprint, effectively leaving [ArcelorMittal] now with only its Mexican and Canadian operations, and its AM/NS Calvert [joint venture] in the US,” Jefferies analyst Alan Spence wrote in a research note on Monday.

ArcelorMittal drove the consolidation of the US steel industry in the early 2000s with the merger of what at the time were the two-largest steelmakers in the world: Mittal Steel Co NV and Arcelor SA.

“The steel industry is in a stronger position today than it has been for many years… This is largely due to consolidation and globalization which is helping to create a more stable operating environment,” Lakshmi N Mittal, the company’s chief executive officer, said in a statement in 2007.

Mittal had burst onto the US steel scene several years earlier – and in part with the help of President Donald Trump administration Secretary of Commerce Wilbur Ross.

Ross founded private equity firm WL Ross & Co LLC, which in 2002 consolidated former steel behemoths LTV Steel Corp and Bethlehem Steel Corp into International Steel Group Inc (ISG). ISG was sold in 2004 to the former Mittal Steel Co for more than $4 billion.

USW gives the OK
The acquisition has been unanimously approved by the board of ArcelorMittal and Cliffs, and is expected to close in the fourth quarter of 2020  – pending regulatory approval and certain closing conditions, Cliffs said.

ArcelorMittal USA is a subsidiary of ArcelorMittal USA, the world’s largest steelmaker. It includes the company’s union-represented mills in the Great Lakes basin and in Pennsylvania.

The United Steelworkers union appeared to endorse the deal.

“Other than name changes and with a new logo, we continue to make steel, just like always,” David McCall, vice president of USW International, said in a newsletter circulated to union members.

“Today is the first day of our new legacy as Cleveland-Cliffs. Our Basic Labor Agreement and associated agreements, such as health-care pensions etc, remain in force for active members and retirees,” Pete Trinidad Sr, president of USW Local 6787, wrote in a notice to union members.

Local 6787 represents union workers at Burns Harbor – the newest of the mills acquired by Cliffs in the deal for ArcelorMittal USA.

Hear Cleveland-Cliffs’ CEO Lourenço Gonçalves, who is set to lead the largest US flat-rolled producer following this acquisition, speak at Fastmarkets’ flagship global steel event: Steel Success Strategies, which is running as an online conference on October 26-28, 2020. Click here to register today.