Bid for US Steel promises national security through consolidation

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Two giant steel mills sit less than 10 miles apart on the shores of Lake Michigan, the blast furnaces inside reaching temperatures of up to 3,000 degrees to smelt glowing iron ore.

A deal proposed this week would put them under common ownership and holds the potential to create an American steel champion in an era of Chinese dominance — or attract scrutiny from US competition regulators.

Cleveland-Cliffs, which owns the mill at Indiana Harbor, has offered to buy United States Steel, which operates its largest works nearby in Gary, Indiana. Its $10bn cash-and-stock offer, including assumed debt, was matched a day later by an all-cash offer from smaller rival Esmark.

Any takeover would further consolidate a US industry now reduced to four main companies: Cleveland-Cliffs, Nucor, Steel Dynamics, and US Steel. US production of steel totalled 80.5mn tonnes last year, compared with 1bn tonnes from China, according to the World Steel Association. Domestic steel prices have improved since former President Donald Trump imposed tariffs on imports and demand increased from the car industry.

Under chief executive Lourenco Goncalves, Cleveland-Cliffs has already expanded, acquiring AK Steel and ArcelorMittal’s US operations in 2020 for $6bn in total.

“There are bunches of products that, 10 years ago, there were only three producers,” said Michelle Applebaum, previously an analyst at Salomon Brothers and Steel Market Intelligence. “To the extent that Cliffs is now Arcelor and AK, the question is how will the justice department feel about this increased consolidation?”

While many steel products are now made using the newer technology of scrap-fed electric arc furnaces, blast furnaces like the ones at the two plants in Indiana remain critical for automotive products — which make up nearly a third of total US steel demand.

Cleveland-Cliffs was founded in 1847 to mine iron ore in the Great Lakes region. By the time the 21st century arrived, costs were too high to export ore profitably to China, forcing the company to vertically integrate. It then bought the US steel mills of ArcelorMittal and AK Steel, its two big customers.

“They’ve been incredibly aggressive,” said Fitch Ratings analyst William Van Meerbeke. “Their industry was dying. There would be no growth ever [without the acquisitions]. Even though the margins would be higher, they would make way less money than they do as a steel company.”

Goncalves was born in Brazil, trained as an engineer and has spent his entire career in metals and mining. He was installed at Cleveland-Cliffs in 2014 after being tapped by upstart activist fund, Casablanca Capital in a fight for control of the company. Goncalves bought $1mn of Cliffs stock himself and said at the time the market undervalued the company “not because of any inherent shortcoming in the assets, but rather because of how the assets have been structured and managed”.

He was the type of executive investors bet on not for any particular long-term vision, but because he seemed like a leader who would find a way to succeed, said one person affiliated with Casablanca.

Goncalves has also developed a reputation for being outspoken. In 2018, following a drop in the company’s share price, he suggested his critics eventually would be so embarrassed they would “commit suicide”. A year later he took a different tone, telling a Goldman Sachs commodities analyst with whom he had disagreed, “I love you.”

In July, he told investors that if carmakers “need the steel they say they need, they have to deal with Cleveland-Cliffs. We are not in the business of gouging anyone. We just want to get paid for what we do.”

Cleveland-Cliffs said in a presentation to investors that acquiring US Steel would create “a stronger foundation for critical infrastructure and national security, along with accelerated job creation”, noting that the combined company would be the only American steel company among the world’s top 10 producers.

The Ohio-based steelmaker’s bid is backed by the United Steelworkers union. Thomas Conway, USW president, said in an August 13 letter to members that “Cliffs did not cut union jobs” after buying AK Steel and ArcelorMittal USA and that the 11,000 unionised workers at US Steel would benefit from its ownership.

Applebaum said the steel industry had partly benefited from the so-called “failing industry” doctrine, where antitrust regulators allow more latitude for mergers and acquisitions when an industry is dominated by importers. But “you can’t say the industry is failing anymore”, she added.

US hot-rolled coil steel prices averaged about $600 a short ton for the decade prior to 2021. That year supply chain snarls and inflation sent them skyrocketing to almost $2,000, before falling to what Van Meerbeke called still “very healthy” levels around $866 this month.

US Steel announced on Sunday that it had launched a review of strategic alternatives after receiving “multiple unsolicited proposals” from prospective bidders. It publicly rejected the Cleveland-Cliffs bid, but serious negotiations are under way between the two companies, said a person involved in the review process.

Privately held industrial and steel group Esmark made its $10bn all-cash offer on Tuesday, though the person involved in the process said it had provided few details about the financing needed to execute such a deal.

Esmark chief executive James Bouchard told the Financial Times that he had spoken to US Steel earlier in the week, after making two previous offers privately, and insisted there was no financing contingency with his bid. He said an acquisition of US by Esmark would “clean up the American steel supply chain”, while questioning the benefits that would result from a deal between Cleveland-Cliffs and US Steel.

“If you merge a dinosaur with a dinosaur, you are going to get a dinosaur,” he said.