Yesterday's Cleveland-Cliffs/Alpha Deal – Why It's Good For Steel Buyers

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Commodities, M&A Activity

Big news in US steel and mining circles yesterday. Cleveland-Cliffs, the largest North American iron ore pellet producer to the steel industry, agreed to acquire Alpha Natural Resources, with 60 coal mines, for almost $10b in a cash and stock deal according to numerous sources. The combined entity to be named Cliffs Natural Resources, expects to sell more than 30 million tons of iron ore and 18 million tons of metallurgical coal annually. This merger would create one of the largest global raw material suppliers to the steel industry. One of the more interesting “takes” on the deal came from this Forbes article which reported, “…Cleveland-Cliffs is killing two birds with one stone, using an $8.9b takeover bid for coal miner Alpha Natural Resources as a way to lift its profile as a supplier to the global steel industry and to reduce its attractiveness as a takeover target.”

As a steel buyer, why should we care whether or not Cleveland-Cliffs is more attractive to the steel industry as a supplier and no longer attractive as a takeover target?

We should care for a number of reasons. First, your friendly neighborhood steel producers are not exactly sharing any of your pain with regard to rising steel prices. Have the producers faced increased raw material costs? Of course but they have also managed to raise prices dramatically this year and have not eaten much if any of these increases as we have reported here. And though we believe some of these raw material costs may have peaked it’s probably better for competition that Cliffs stay independent, bigger and more powerful than fall in the hands of a steel producer like ArcelorMittal, who had made a bid for Alpha Natural Resources just over a month ago according to this Financial Times article. ArcelorMittal has also been making bids for other raw material suppliers – see this earlier MetalMiner post. But the risk of being gobbled up by a steel producer may be muted against the risk of being gobbled up by another iron ore producer such as Rio Tinto or BHP Billiton (though it’s unclear whether such a deal would be approved from an anti-trust perspective). What we have learned from these stories and these is this: consolidation is inevitable and often needed. However, who was it that once said, “absolute power corrupts absolutely”. If this deal keeps a coal producer and an iron ore producer out of the hands of anyone else, who are we to complain?

–Lisa Reisman

Comment (1)

  1. Jason Busch says:

    Vertical integration in a market which, to an outsider, clearly feels collusive from a pricing standpoint, would drive up prices further. We should thank the invisible hand that ArcelorMittal’s bid did not pan out.

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