MetalMiner breaks down Cleveland-Cliffs’ acquisition of ArcelorMittal USA

mergers and acquisitions
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As we noted earlier this week, the Cleveland-Cliffs acquisition of ArcelorMittal USA came at a price tag of $1.4 billion.
This comes after Cleveland-Cliffs acquired AK Steel earlier this year (among other things, AK Steel is the lone remaining U.S. producer of electrical steel).
The deal includes nearly all of the ArcelorMittal subsidiary’s North American facilities (with a few exceptions, as we will elaborate on shortly). Cleveland-Cliffs expects to close the deal in Q4 2020.
Since the announcement, Cleveland-Cliffs shares are up over 12%.
So, what does the merger mean for the North American metals scene and relevant sectors, like automotive?
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Initial reaction to Cleveland-Cliffs acquisition of ArcelorMittal USA

Overall, this seems to be a solid move for everyone involved.
ArcelorMittal offloads old assets that have a high cost structure for producing steel while still maintaining a mill with one of the lowest cost structures in the country.
On the other hand, Cliffs gains a large auto book of business with good margins. Furthermore, the steel market will see old, expensive capacity taken out. As such, that will make room for new capacity scheduled to come online in the near future.

Strengthening auto position

As noted previously, the acquisition makes Cleveland-Cliffs the largest flat-rolled steel producer in North America. The deal will also make Cleveland-Cliffs — the oldest iron ore mining company in the country — the largest iron ore pellet producer in North America, with 28 million long tons of capacity.
The deal further strengthens the company’s position in the automotive sector. The company likely controls 60%-65% of exposed auto sheet supply (think the steel used on the outside of a car).

What about ArcelorMittal?

As for ArcelorMittal, it is still hanging onto a few North American assets.
Those remaining assets are:

  • AM/NS Calvert in Calvert, Alabama
  • Dofasco in Hamilton, Ontario
  • Lazaro Cardenas, Mexico plant

“These assets represent a strong footprint in North America with Dofasco and ArcelorMittal Mexico amongst the lowest cost producers in the region,” ArcelorMittal USA said in a release earlier this week. “AM/NS Calvert, which is already amongst the world’s most advanced steel finishing facilities, will be augmented by the recently announced intention to construct an EAF to optimise its slab sourcing.”
ArcelorMittal said it will also retain its R&D program and innovation centers “to maintain its product and process development that underpins its leadership position.”
However, on balance, the sale essentially represents a move out of integrated steelmaking in the U.S. for ArcelorMittal.

Biggest loser?

Automotive OEMs, like General Motors, Ford, Honda, Toyota, etc.
Why? The merger means there are fewer players to create competition.
ArcelorMittal pricing will likely fall under the Cliffs/AK purview; there will be some price normalization across the assets. In short, there will be fewer places to pit one price off another.

Short-, long-term price impacts

Cliffs will likely shut down several facilities, reducing the overall capacity of the market and putting a dent in the “Steelmageddon” thesis (i.e., that a surge in U.S. capacity would depress prices).
This move gives the market some long-term price stability.
Meanwhile, in the short term, the Cleveland-Cliff acquisition will have little fundamental impact on prices. However, the deal could trigger future buying panic, sparking off a rapid price increase.
Stop obsessing about the actual forecasted steel price. It’s more important to spot the trend. See why.

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