One of the most prestigious industrial brands in the US economy might soon be swallowed by the sector.
This week, US Steel (X) disclosed that the business is considering “strategic alternatives” in response to “multiple unsolicited offers,” including a $7.3 billion offer from Cleveland-Cliffs (CLF), a rival that it turned down.
In addition, US Steel got a $7.8 billion bid from privately held Esmark, and it’s been claimed that European industrial giant ArcelorMittal (MT) is also interested in the company. A deal like this would allow US Steel to enter the market again after ArcelorMittal sold its US operations to Cleveland-Cliffs in 2020.
In response to Cleveland-Cliffs’ offer, US Steel stock increased by more than 35%, increasing its gains for the year to date to just under 25%. Shares of Cleveland-Cliffs have decreased by around 7% this year, matching the decline in US Steel stock prior to the company’s acquisition bid.
The steel prices in the bids are likewise more than 50% lower than their epidemic peaks.
Josh Spoores, a steel analyst at CRU Group, declared, “We’ve just seen the glory days happen.” “Steel corporations generated huge sums of money in the two years following the pandemic lockdowns. We are currently returning to levels that are closer to normal.
When the price of the underlying commodity hit a record high of nearly $2000 per tonne during the pandemic in 2022, US Steel’s annual income increased from $12.93 billion in 2019 to $21.06 billion.
According to Bloomberg data, analysts anticipate a 15% reduction in revenues this year, a 13% decline in 2024, and a 61% and 50% decline in adjusted profitability, respectively. This year’s total steel shipments are predicted to increase by 1.19%, and by 4.11% in 2024.
The Pittsburgh-based behemoth has participated in conventional steel production utilising blast furnaces since its founding in 1901. The business has more recently made investments in electric arc furnaces, which offer a cleaner, more economical way to make steel by reusing scraps.
“[US Steel] has been making investments in some important new facilities. Additionally, they have been carrying a sizable amount of cash on their balance sheet as they get ready to pay for new equipment for their facilities, Spoores added.
“Overall, I think they’re in a great position to serve the North American steel market in the decades to come because of what they’re doing,” he continued.
Even though the US has long since passed its peak in steel production, a merger between US Steel and Cleveland Cliffs would make them the sole US corporation among the top 10 steel producers worldwide.
Through the Inflation Reduction Act, which was passed last year, the government is anticipated to invest over a number of years in manufacturing, renewable energy development, and infrastructure.
During the company’s second quarter results call, US Steel CEO David Burritt commented, “I’d say the IRA is misnamed.” The Manufacturing Renaissance Act, I believe. We salute those who made it possible and anticipate the positive repercussions it will have on the steel sector for years to come.
An expert in the field referred to the spending as “an unprecedented perfect storm.”
According to Evan Mann, senior high-yield analyst at Gimme Credit, “all of those things could potentially result in a big boon for the steel industry.”
“I believe they are setting up for it. Regulatoryize the sector. Get rid of the inefficient capacity to guarantee that prices would be better and that everyone in the industry will profit more as demand increases, the speaker continued.
Regulatory obstacles are expected to accompany a merger between two major US steel companies, according to industry observers.
For instance, if Cleveland-Cliffs acquired US Steel, the merged business would become the US’s exclusive supplier of the iron ore needed to run blast furnaces.
Dale Crawford, executive director of the Steel Tube Institute, a non-profit organisation that represents producers of steel tubing used in everything from warehouses to electrical infrastructures, said, “My biggest concern is that it will lead to increased supply price pressures that will make it harder for domestic manufacturers to compete.”
The market for electrical steel, which is used for EV components like motors and charging infrastructure, might also raise regulatory eyebrows.
The largest US producer of the material is Cleveland-Cliffs, and US Steel is developing a new line to supply the same product domestically.
During the most recent earnings call, Burritt stated, “I’m so confident in our ability to not only be successful but disruptive to the electrical steel market in the United States.” The electrical steel industry is one of the fastest-growing, according to US Steel, with room for margin expansion.
Once more, you have a competitive move that the rival firm is really attempting to acquire [US Steel] to get rid of,” Spoores added. “It would be extremely difficult for this to pass antitrust investigations. There would need to be a divestiture of something or many things.
Even if other bids are said to have entered the fray, US Steel and Cleveland Cliffs, the two main players in the restructuring of the American steel sector, don’t appear to be very close to agreeing on a transaction structure.
Cleveland-Cliffs’ offer was deemed “unreasonable” by US Steel CEO Burritt in a letter to that company’s CEO Lourenco Gonclaves. But Cleveland Cliffs is staying at the table and negotiating.
Since the United Steelworkers announced on Thursday that they were supporting Cleveland-Cliffs, the industry union is now on their side. Cleveland-Cliffs has the right to make a proposal on its behalf because a purchase would need USW’s approval.
Thomas Conway, president of the USW, wrote in a letter earlier this month, “We have no doubt that the extension of our strong partnership with Cliffs to the 11,000 union represented employees at USS will benefit the employees, their families, and the communities in which they operate.” “A strong and effective U.S. labour force is essential to our nation.”
In a statement on Thursday, the business said that “Cliffs is the only real buyer able to acquire the entirety of U.S. Steel” with the help of the exclusive assignment.
Before all is said and done, Spoores predicted that the offers will become a little more aggressive and greater in value.