In the news the past several months has been the impending sale of ThyssenKrupp’s Steel Americas business, with mills in North America (Alabama) and in Brazil. Last week several steel producers – including ArcelorMittal, AK Steel, and Nucor – came back with bids for Thyssen’s mills.
Will this affect the domestic and global steel production landscape? I sat down to chat with MetalMiner Managing Editor Lisa Reisman to speculate a bit.
Q: What would be the main benefit(s) for the winning bidder if they were to acquire Thyssen’s NA mills, from both a production and profitability standpoint?
A: There are several benefits to both a domestic producer going after the US operation (and South American producer purchasing the Brazilian operation) or a global producer going after both operations.
A: The benefits include the purchase price – indicative early offers suggest the asking price has fallen below the book value of $9 billion, according to ThyssenKrupp CEO Heinrich Hiesinger, based on an announcement he made back in August.
Timing may also prove a large benefit – these mills went through the construction process during a recession and the steel industry has not come back to the levels it had seen prior to the recession. The ROI on these investments make it such that Thyssen feels it could better deploy its resources elsewhere.
A second benefit involves the technology – the mills likely have state of the art technology which would allow the buying producer to either idle older higher cost plants or move production to the new facility for strategic regions. Alabama of course is a right to work state so these facilities could also have lower labor cost structures.
Q: If the economy (and with it, steel demand) doesn’t turn around significantly in the next few years, why would the producer making the offer want to add more capacity? Is this bidding process a signal that US mills (Nucor, AK, others) believe demand is on its way up – and sustainable – in the latter half of this decade?
A: An acquisition of this sort might make sense not so much in terms of adding capacity, but replacing existing higher-cost capacity. I definitely believe that the buyers all have an eye on longer-term demand. My prediction – the asking price will get bid up because of competition. It’s likely many believe demand will improve during the second half of this decade and the producers likely view this as a long-term strategic buy.
The other observation with this process has to do with the timing of the mill construction. Many mining firms, steel producers and others did acquisitions at the peak of the market while the super-cycle appeared as though it would last indefinitely. When companies make decisions in frothy times and the economics no longer make sense once reality has set in, everybody else comes into the market to try and pick up the pieces for a song.
Q: Although the deal (if it goes through) wouldn’t be complete until 2014, what would it mean for steel production and prices down the line – if anything?
Truthfully, it means absolutely nothing from a steel price perspective. The US mills have figured out that they need to carefully watch demand and tweak supply to meet that demand. I think the buyers out there have looked at their own footprints and have strategically thought through the cost structure and potential advantages of adding this production facility to the overall footprint. My bet – that old capacity will come offline as opposed to simply get added to the overall domestic capability.