Cliffs transforms from miner to steelmaker

Cleveland-Cliffs is on track to begin 2021 as one of the largest steelmakers in the US and a primary supplier of flat-rolled steel to the automotive industry.

It has been a year of transformation for the raw materials company, which began 2020 as an iron ore miner in the midst of purchasing one of its customers, integrated steelmaker AK Steel. The now flat-rolled producer could end the year as one of two US-based blast furnace operators, along with Pittsburgh-based US Steel.

The purchase of AK Steel made Cleveland-Cliffs the fifth largest flat-rolled steelmaker in the US by its estimation, with the formerly independent steelmaker shipping 5.34mn short tons (st)/year of flat-rolled products in 2019. With the subsequent acquisition of substantially all of ArcelorMittal USA's assets, Cliffs added another 11.2mn st/yr of flat-rolled capacity, making the combined company the largest producer of the kind, eclipsing electric arc-furnace (EAF) steelmaker Nucor. Based on actual shipments from its two acquisitions, Cliffs would have shipped 16.54mn st in 2019, compared to Nucor's 12.7mn st of sheet and plate volumes.

EAF flat-rolled expansions loom

Although Cleveland-Cliffs is poised to grow exponentially this year, subject to approval by US government regulators, it comes as the US steel industry stares down large flat-rolled expansions by EAF steelmakers while integrated steelmakers remain under cost pressure from their lower-cost EAF rivals.

EAF steelmakers Big River Steel, Nucor, Steel Dynamics and North Star Bluescope all have expansions in progress that, combined, are expected to increase flat-rolled coil production by nearly 7mn st/yr. In addition, Nucor is also building a 1.2mn st/yr plate mill in Kentucky, expected to be completed in late-2022, while ArcelorMittal is building a 1.5mn st/yr EAF at its rolling mill in Calvert, Alabama, to provide domestically produced slabs for the facility. ArcelorMittal retained possession of the Calvert mill, in addition to its Dofasco blast furnace in Canada and its steel operations in Mexico.

Cleveland-Cliffs' purchase of ArcelorMittal's US assets may put the company and its chief executive Lourenco Goncalves in the position to reduce integrated steel production to help fit in the expanded EAF footprints, avoiding massive oversupply in the US market some analysts have predicted will happen in the next few years.

"If Lourenco were to decide to shut down a significant part of (the acquired ArcelorMittal USA assets), it actually could help balance the market much more quickly and effectively than we have been concerned about," Bank of America Merrill Lynch analyst Timna Tanners said.

Cleveland-Cliffs' more limited balance sheet compared to multinational steelmaker ArcelorMittal could create much of the impetus for Goncalves to make moves quickly on his company's newly acquired assets.

"There's an ability for Cliffs to take a hard look at the footprint, perhaps not having the luxury of the balance sheet that ArcelorMittal has ... and make some decisions that may ultimately lead to some consolidation of sheet or plate capacity, which I think is kind of the win for the market," Cowen analyst Tyler Kenyon said.

The purchase does provide Cleveland-Cliffs with the ability to control the sales of its iron ore pellets by vertically integrating, KeyBanc anaylst Phil Gibbs said.

The only way that Cliffs could ensure its business was defensible was buying its customers and owning more of the blast furnaces, Gibbs said.

Iron ore customers guaranteed

The purchase of AK Steel guaranteed that Cleveland-Cliffs would have a customer for at least 6mn gross tons (gt)/yr of its iron ore pellets. The addition of ArcelorMittal USA's assets, some of which Cleveland-Cliffs has tailored its mines to serve, raises that figure to 13mn-16mn gt/yr, while adding an additional 8mn gt/yr of pellet production from to-be purchased ArcelorMittal USA mine assets, according to a presentation by Cleveland-Cliffs.

The combined company expects to try to serve third-party purchasers with merchant pig iron to the tune of 2mn-3mn gt/yr.

Goncalves addressed a possible pivot toward producing merchant pig iron with the ArcelorMittal blast furnaces directly in a call with analysts on 28 September.

"The seven blast furnaces we are adding to our portfolio expand our options in becoming a meaningful future supplier of merchant pig iron to other steel companies in our space, if and when we decide to do so," Goncalves said.

The growth in US EAF steelmaking, which consumes large amounts of scrap and pig iron to produce steel, will only add to the need to produce more domestic pig iron.

Currently EAF steelmakers are reliant on imports of pig iron from countries such as Brazil, Russia and Ukraine to balance the iron content of their steel against the mostly scrap-heavy melts.

The US imported 4.92mn t of pig iron products in 2019, down by 18pc compared to the prior year, according to Commerce Department data. Year-to-date through July 2020, pig iron imports into the US have totaled 3.04mn t.

"The whole idea of being a US steel producer is that you can get all of your critical raw materials domestically, for the most part," Gibbs said. "If you build all these plants you are almost becoming more subject to global volatility in your raw materials … if you order your pig iron today, you may not get it until 2021."

By Rye Druzin

US flat-rolled capacity mn st