The strategic case for iron miner Cleveland-Cliffs to buy the U.S. business of European steelmaking giant ArcelorMittal seems to make a lot of sense. It would be great to look at the transformation of Cliffs this year and conclude it’s great news for Minnesota’s steel industry.
Honestly, it’s too hard to tell.
If you want to feel better about the deal and the industry, maybe stay away from steel industry news and its frequent references to something called “Steelmageddon.” The term came from a high-profile financial analyst who thinks American steel is in for serious pain that only eases with the shutdown of lots of excess capacity.
Ohio-based Cleveland-Cliffs, one of the last major miners in northeastern Minnesota, last week announced that it had agreed to buy ArcelorMittal’s U.S. business, its biggest ore customer. Expected to close by the end of the year, the deal is a stock and cash purchase of almost all of ArcelorMittal’s U.S. assets, including the largest integrated steelmaking facility in North America.
Last year, half of Cliffs’ ore production went to ArcelorMittal while roughly 30% went to a company most recently called AK Steel.
For those who missed the news, Cliffs completed its acquisition of Ohio-based AK Steel earlier this year.
When the second deal closes, Cliffs will be a very big steelmaker, particularly in flat-rolled steel for the auto industry. Almost all of Cliffs’ ore will go into its own operations.
It certainly looks like a smart move, the latest in a series of decisive ones since CEO Lourenco Goncalves took over Cliffs six years ago. There’s risk on every acquisition, of course, yet it looks likely that Cliffs will emerge more profitable and less heavily indebted. It will have the opportunity to reduce duplicative costs and reap the benefits of just being a lot bigger. Its stock moved up on the news.
Among the things the stock analysts liked is that Cliffs has “de-risked” its iron ore pellets business. That’s their way of saying Cliffs can’t lose its taconite customers anymore because it’s become its own customer.
To have the Minnesota iron mining industry’s biggest merchant supplier turn itself into a steelmaker could be seen as the end of an era here, except for what has been happening with another company, U.S. Steel Corp.
Once the largest steelmaker in the world, U.S. Steel is now well down the ranking and a fraction of the size of ArcelorMittal and the Asian-based firms at the top the list.
To keep efficiently utilizing its Minnesota mining assets, U.S. Steel has moved from being a vertically integrated producer like Cliffs, mining for itself, to also selling iron ore pellets to others.
In the spring U.S. Steel announced a new supply agreement with Algoma Steel of Canada and agreed to a deal that would grant a one-fourth interest in U.S. Steel’s Minntac operation in Mountain Iron to Stelco, another Canadian steel company, one that had a brief and unhappy experience as part of U.S. Steel.
Consolidating an industry like Cliffs has been doing or finding customers for in-house operations that can’t be kept busy enough are not signs of a healthy and growing industry. And that’s before Steelmageddon.
That term was invented by BofA Securities analyst Timna Tanners, predicting how new capacity will lead to a steel glut so severe that apocalyptic language is required to talk about it. Tanners and her colleagues were so confident in their forecast that they trademarked the term Steelmageddon.
Her thesis is not just that there’s more steelmaking capacity coming, but it will be more efficient than the older blast furnaces, with many finally forced into shutting down.
“A substantial amount of capacity currently held by U.S. Steel and Cleveland-Cliffs would need to permanently close to balance the market,” Tanners and her team wrote last week in a research note, after Cliffs announced its latest acquisition.
“While necessary, we continue to think such a move would take time, and would happen after a prolonged period of depressed prices and/or demand.”
Taconite, a great Minnesota success story, is a processed iron ore product made from low-grade natural ore that’s meant to get used in the traditional steel operations of Cliffs and U.S. Steel.
This isn’t exactly new information, and players here have taken steps to invest in the transition.
Material derived from ore is used in these new electric arc furnaces in addition to scrap, but it can’t be the kind of taconite pellets that have shipped out of Minnesota now for decades.
Cliffs has nearly finished a plant in Ohio that will produce what’s called hot briquetted iron, which does look like the charcoal briquettes used in backyard grills. Cliffs put the plant in Ohio to be close to a number of facilities that can use this product.
Another diversification effort lies fallow near Nashwauk in northeastern Minnesota, a project long known as Essar Steel Minnesota.
It’s basically a half-completed taconite project now without control of its own proposed ore deposit, including portions of the mining land now controlled by Cliffs.
Back when this project still looked like a viable deal, Essar Steel Minnesota announced a 10-year supply agreement with ArcelorMittal. Copies of that contract have obviously been filed away forever.
There’s no obvious customer for any taconite pellet production now.
So that’s where the industry in Minnesota sits. U.S. Steel needs to revitalize its business and Lourenco Goncalves needs to fold a really big acquisition into Cleveland-Cliffs and then successfully manage all of it.
And then, of course, Steelmageddon needs to turn out to be just entertaining talk.