SSS XXXIII: Algoma CCAA exit near; investments eyed – CEO

Algoma will likely emerge from bankruptcy protection within a matter of weeks, the company’s top executive said.

“It should happen relatively quickly, within the next couple of weeks,” Kalyan Ghosh, the company’s president and chief executive officer, said in an exclusive interview with American Metal Market at the Steel Success Strategies XXXIII conference in New York.

The development, which could take place in as little as two weeks but probably no later than August, has hinged in part on the United Steelworkers union ratifying a new labor contract.

USW Local 2251, which represents hourly works at Algoma, ratified the contract on Tuesday June 26 with 75% of votes cast in favor of the deal, according to a union notice.

“We will come out with a proper balance sheet,” Ghosh said.

It is an important milestone for a company that has been under Companies’ Creditors Arrangement Act (CCAA) protection since 2015. CCAA is roughly the equivalent of Chapter 11 bankruptcy protection in the United States.

The labor deal with the USW is between the union and Algoma’s secured creditors. A final step in the emergence process is for the province of Ontario to approve the agreement, Ghosh said, declining to say who the secured creditors were. They have been said by other sources to be Golden Tree Asset Management LP and Bain Capital LP.

Investment on horizon
“We will be spending quite a lot of money in the coming few years,” Ghosh said, namely hundreds of millions of dollars over the next five years to repair and upgrade Algoma’s operations – including hard assets such as the mill’s caster along with digital capabilities – something the company was largely unable to do under CCAA.

“Because we have not spent much money in the last few years, and we need to catch up,” he said.

The improvements to the mill’s caster will allow Algoma to improve quality, reliability and to expand its portfolio of products. That includes a wider range of sheet and plate offerings to the automotive, energy, yellow goods and wind tower sectors, Ghosh said.

One thing the company was able to focus on while it was under CCAA was lowering costs, and in particular conversion costs. “We are one of lowest-cost producers in North America,” he said. “That has really put us on solid footing.”

Also helping is Algoma’s Direct Strip Production Complex (DSPC), which Ghosh described as the “crown jewel” of the company. “We will modernize it so that it can produce grades that today it cannot,” he said.

Algoma is the only blast furnace producer in North America with a DSPC, giving it a leg up on other integrated steelmakers that must first cast slabs and versus mini-mills that can cast steel directly but whose quality Ghosh said is limited by a their mostly scrap-based feedstock.

Tariffs: challenges and opportunities
While Algoma’s emergence from CCAA is just a matter of time, what’s less clear is the impact of increased trade tensions between the US and Canada, Ghosh said.

The US unexpectedly hit Canada, a North American Free Trade Agreement (Nafta) trading partner and military ally, with Section 232 tariffs on June 1 – 25% in the case of steel. Canada is slated to retaliate with tariffs on US imports of steel and a wide variety of other products effective July 1.

“The US has linked [Section 232] to Nafta, and I suppose the governments will work very hard in the next few months to get a result. Because it is not a question of only affecting a single steel company. It is a question of instability in the [North American] supply chain,” Ghosh said. “The uncertainty is good neither for the steel companies nor for its customers.”

Big automakers, whose supply chains are deeply interwoven across the border, aren’t the only ones to be hurt by the tariffs. Small manufacturers that might be located in one country but have traditionally sourced steel from a mill in the other will also feel the impact.

Algoma has approached the US and Canada as a single market by, for example, serving customers throughout the Great Lakes Basin, no matter which side of the border they are on. That commercial strategy might have to change if tariffs change the trade landscape, Ghosh said.

 “Once you start segregating the markets, then new markets [open] up for you. But some markets close,” he said. “The whole relationship between supplier and customer had not really looked at boundaries… So it will rejig the whole supply chain over time.”

That doesn’t necessarily mean that Algoma will come out in a worse position, according to Ghosh. The company is the only plate supplier in Canada – and so duties on US mills would effectively knock out the competition. “Being the only one in Canada, we hope to take advantage of that,” he said.

Canada is the top supplier of foreign cut-to-length plate to the US market. The US imported 57,025 tonnes of plate in April, of which 20,716 tonnes (36.3%) came from Canada, according to data from the US Commerce Department’s Enforcement and Compliance division.

But the US in some months exports twice as much plate to Canada as it imports from its northern neighbor. For example, the US exported 78,394 tonnes of plate in April, the last month for which export figures are available. Canada received 41,083 tonnes (52.4%) of those tonnes. Most of the balance was shipped to Mexico, which is also retaliating after its shipments to the US were declared a threat to national security and it was hit with 25% steel tariffs.

The uncertain trade landscape created by the Section 232 tariffs has sent American Metal Market’s hot-rolled coil index soaring to $45.52 per hundredweight ($910.40 per ton) as of June 21, the highest point for hot band prices in nearly a decade.

American Metal Market’s price assessment for cut-to-length plate was at $47.50 per cwt ($950 per ton) on June 22, up 1.1% from $47 per cwt previously and the highest point since reaching $47.75 per cwt in November 2011.