CMC-Gerdau deal done; market impact murky

Now that Gerdau's highly anticipated sale of four US rebar mills and 33 rebar fabrication locations to CMC has been completed, industry sources remain unclear as to the deal's long-term ramifications.

The $600-million deal closed on Monday November 5 – just over 10 months after it was announced – and included rebar mills in Jacksonville, Florida; Knoxville, Tennessee; Rancho Cucamonga, California; and Sayreville, New Jersey. Reactions from market participants who spoke with Fastmarkets AMM ranged from concern over the level of market control CMC will have to a belief that the deal will stabilize the rebar market.

“It will be very easy for CMC and Nucor to push up prices,” a rebar trader said, adding that the deal will significantly reduce competition. “They will have more power to control prices with imports out of the picture.”

According to license data from the Department of Commerce, US rebar import volumes totaled 55,879 tonnes in October, down 67% from a year-to-date high of 169,334 tonnes in April.

Fastmarkets AMM last assessed US domestic rebar at $35-36 per hundredweight ($700-720 per ton) on October 17 – unchanged since mid-April but up 20.3% from $29-30 per cwt at the start of the year.

No divestment, no problem?
KeyBanc Capital Markets analysts Philip Gibbs and Michael Leshock noted that CMC was not required to divest assets to complete the deal. Market participants thought divestment of some assets by CMC would be essential for the Department of Justice to approve the sale.

“The deal does not include a consent decree whereby CMC would have to divest certain US rebar assets in a specified period of time, which we previously viewed as the most likely outcome given the high degree of rebar market production concentration between [Nucor] and [Commercial Metals Company],” Gibbs and Leshock said in a November 5 research note. Nucor and CMC now account for 80% of US rebar production and 70% of market share, according to the analysts.

The rebar trader said the deal could result in increased efficiency of the Gerdau assets purchased by CMC, since the steelmaker must ensure it meets market demand given its dominant position.

Before the deal was completed, CMC president and chief executive officer Barbara Smith said it would boost the company’s melting capacity by 77.1%, to 6.2 million tons per year from 3.5 million tpy, and rolling capacity by 75.8%, to 5.8 million tpy from 3.3 million tpy. CMC expected to spend approximately $200-250 million to upgrade the Gerdau facilities over the next five years.

“I’m hopeful that it’s going to be good for the marketplace,” one rebar producer said, noting that his optimism hedges on what CMC does on the fabrication side. “Independent fabricators said CMC [prices] were always cheap, so it’ll be interesting to see if they stay low,” he added. “CMC will have a lot of rebar capacity.”

A rebar distributor doesn’t see the deal as the end of Gerdau’s involvement in the domestic rebar market, since the Brazilian steelmaker continues to produce the material at its mills in Midlothian, Texas, and Jackson, Tennessee. The source noted that the company also has mills in Iowa and Minnesota that could shift from special bar quality(SBQ) production to rebar production if demand warranted it.

The same source said the deal essentially means that CMC has supplanted Nucor in terms of its ability to influence rebar pricing.

“Nucor used to be the leader, and they don’t have that power anymore,” the distributor said.

Said a second distributor: “I am wondering what Nucor is thinking. They have not been the second fiddle for a long time.”

Nucor did not immediately respond to Fastmarkets AMM’s request for comment.

The first rebar distributor continued that the deal will likely impinge on the competitiveness of independent fabricators.

“I think it’s going to put more pressure on the independents of the world,” this distributor said. “[CMC’s] operations are going to have a lot more flexibility.

“The two big dogs [CMC and Nucor] will have 80% of the market. If you’re not part of the team, it’d make you a little worried.”

‘A win-win situation’
Top executives for CMC and Gerdau lauded the deal, as did the Steel Manufacturers Association (SMA).

“I am thrilled to welcome the approximately 3,200 employees of these operations to Commercial Metals Co,” Smith said in a statement on November 5. “The successful completion of the transaction represents an important step in our strategy to be the leading concrete reinforcing specialist, as well as a significant provider of merchant and wire rod products.”

Gerdau CEO Gustavo Werneck hailed the transaction as “an important milestone in our strategy… to focus on better return opportunities.”

SMA president Philip K. Bell told Fastmarkets AMM via email that the deal is “a win-win situation that aligns with both companies’ long-term, strategic objectives. CMC is a leader in rebar manufacturing technology. This deal will improve CMC’s operational flexibility and enhance their ability to service rebar customers in expanded markets. 

“The deal is a major step in Gerdau’s continued transformation and affords the company an opportunity to increase its focus on the SBQ, structural and merchant bar markets.”

The first rebar distributor was not ready to echo such positivity.

“It’s still too early for us to determine good, bad or otherwise,” he said. “By the first quarter [of 2019], we’ll have a lot better view of how it’s going to impact the market.”