Final Thoughts

Final Thoughts

Written by Michael Cowden


Earnings season is (mostly) done and dusted, so I’d like to turn your attention to another season: M&A announcement season.

Bankers like to get deals done before Christmas. And I think there is a decent chance that any deals in the pipeline now are announced in the next month or so.

Also, while spot prices for steel might have peaked, contracts are resetting significantly higher and there is still a lot of money sloshing around in steel mill land.

gearsSteel Mills

First, let’s talk steel mills. The standard response is that there isn’t much to talk about when it comes to consolidation at the mill level. Because there are only four major U.S. sheet mills left: Cleveland-Cliffs, Nucor, Steel Dynamics Inc. (SDI), and U.S. Steel.

But let’s not forget that a mill doesn’t have to buy all of one of the independents that remain out there – or that some of those independents might have expansion plans of their own. And let’s also remember that the deal potential is greater if we expand our sights to include not only U.S. mills but also producers in Canada and Mexico.

Let’s in addition remember that it doesn’t need to be entire companies that are bought or sold. It might be a particular mill or a few lines that are of interest rather than an entire steelmaker or processor.

Remember when – and this dates me – SSAB bought IPSCO in 2007? The Swedish steelmaker in 2008 sold most of the company, notably its tubular operations, to Russian steelmakers Evraz and TMK. In the end, it kept for itself IPSCO’s U.S. plate mills. In other words, there can be creative ways to get what you want if the parties involved are willing to be flexible – and maybe willing to slice and dice too.

Upstream for Prime Scrap/Ore-Based Metallics

Many North American mills have already announced or enacted plans to expand upstream to secure supplies of prime scrap and iron-ore based metallics such as pig iron and direct-reduced iron (DRI). They’ll need those high-quality iron units to feed electric arc furnaces (EAFs) already in operation, ramping up or slated to be built in the years ahead.

You know those deals by now: Cliffs buying Ferrous Processing and Trading Co. (FPT) for $775 million, BlueScope acquiring MetalX for $240 million and Algoma forming a joint venture with Triple M Metal. And I’d add to this category ArcelorMittal expanding upstream into DRI and DR-grade pellets in both Canada and Latin America now that its new hot strip mill in Mexico is nearly complete.

Keep in mind, too, that it’s not just a hunger for high-quality metallics that’s driving these deals and expansions, so too are regional content requirements in the United States-Mexico-Canada Agreement (USMCA) – a factor that I think is sometimes overlooked.

And so my question is this: What are you waiting for if you are melting scrap now or if you plan to in the future? A squeeze on prime scrap is coming. That won’t be pleasant if you don’t have a switch to flip relieve at least some of the pressure.

Downstream for CR/Coating

Nucor has made a point of adding pickling and galvanizing capability to Gallatin, the Ghent, Ky., steel mill it acquired in 2014 for $770 million. Gallatin was mostly a hot rolled play with a knack for making substrate for tube makers when it was acquired. Its horizons have been expanding ever since.

Ternium CEO Maximo Vedoya said on the company’s earnings call that, with its new hot strip mill in Mexico complete, it was looking not only upstream but also downstream at pickling, cold rolled and coating capacity.

And BlueScope has said it is considering building a coating facility somewhere east of the Rocky Mountains, presumably to supplement North Star BlueScope in Delta, Ohio, which is mostly a HR play at present. You get the point: The days of mills making just HRC are probably numbered.

BlueScope is also notable in that it already has a lot of experience and knowledge of coated markets, especially when it comes to the construction sector. That comes thanks to its SteelScape joint venture with Nippon Steel on the West Coast.

I think it’s hard to see North Star BlueScope expanding not only upstream with its acquisition of MetalX but also downstream into cold rolled and/or coated products – just as its competitors have already done. North Star BlueScope has built and commissioned a third EAF, and a second caster is expected to be up and running sometime in the first half of next year. The company will thereafter have a lot more hot band to either sell into the market – or to push into downstream into cold rolled and coated products.

BlueScope declined to comment beyond its previous announcements for this column. But whether it’s BlueScope, Ternium or someone else, we expect some action in either CR/coated M&A or greenfield expansions.

I said in these pages a few months back that I could think of a few scrap companies that might be for sale. And I can think of a few coating companies where mills might be kicking the tires too. The build-versus-buy equation is trickier than in the past. How do you agree on valuation following a year of the highest steel prices ever?  Consensus is that prices have peaked. But there is not agreement on when and how much they might come down.

I’d chalk that up to a post-pandemic world – one in which inflation, labor shortages and supply-chain snarls are proving stubbornly persistent. I think that means pre-pandemic models might not be as predictive as they used to be. But that’s another topic entirely. So let’s stick to M&A.

Plate and Structural Tubing Too?

Downstream is a lot more than coating, of course. I can see scenarios in which mills might be looking to add plate capability or increase plate capacity – especially with infrastructure spending expected to boost demand for plate more so than for other flat-rolled products.

Could we see a new tube mill? Infrastructure spending would create more demand for structural tubulars such as hollow structural sections (HSS) just as a continued boom in warehouse construction should keep demand firm for tubing used in racking. That’s another space I’d keep an eye on.

Also, while I’ve focused on M&A, let’s not forget that we could see more greenfield announcements.

Nucor has announced that it will build a new EAF sheet mill in either Ohio, Pennsylvania or West Virginia. Look at the map. It’s hard to see how that doesn’t land somewhere along the Ohio River.

Nucor’s new plate mill is also being built on the Ohio River, in Brandenburg, Ky. And I’m relatively certain that there are a few other sites in the Ohio Valley that have been kicked around over the years and that might still be in the running for a new mill. It doesn’t hurt, as I’ve noted before, that the area might be less vulnerable to future scrap shortages.

By Michael Cowden, Michael@SteelMarketUpdate.com

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