Cleveland-Cliffs' ArcelorMittal Asset Purchase Could Help Combat 'Steelmageddon'

On Monday, ArcelorMittal SA MT announced the sale of nearly all of its U.S. steel-making assets to Cleveland-Cliffs Inc CLF for $1.4 billion. The deal will make Cleveland-Cliffs the largest U.S. blast furnace operator and auto sheet supplier and will have a major impact on the dynamics of the U.S. steel industry.

On Tuesday, Bank of America analyst Timna Tanners said Cleveland-Cliffs may have such a dominant position that the deal could get the attention of regulators, particularly given the company’s leading exposure to the automotive industry.

Meanwhile, Tanners said the asset sale is a part of ArcelorMittal’s strategy to focus exclusively on its highest quality assets.

Rebalancing Opportunity: Tanners said the deal could have a profound impact on United States Steel Corporation X and the rest of the American steel industry, but it will depend on what Cleveland-Cliffs plans to do with the assets it acquired.

Tanners has been warning investors of a coming “Steelmageddon,” a glut of new electric arc furnace-based sheet mills and a flood of potential steel supply. However, Tanners said Cleveland-Cliffs could now take a major stride in balancing the market if it shutters its newly-acquired assets.

“We estimate 10-14Mt of sheet/plate supply would need to shut to balance the market, which could theoretically be addressed from the 17Mt of sheet/plate capacity CLF would acquire, although not all this capacity has been operating,” Tanners wrote in a note.

Unfortunately, Tanners said a “substantial amount” of the combined capacity of U.S. Steel and Cleveland-Cliffs would need to permanently close to balance the market, and that process would likely only happen after an extended period of depressed steel prices.

Bank of America has an Underperform rating and $3 price target for U.S. Steel.

Benzinga’s Take: The best-case scenario for U.S. Steel investors would be for Cleveland-Cliffs to shut down the ArcelorMittal and take a near-term hit for the sake of the long-term outlook for the American steel industry. However, even if that is the plan, the market dynamics in the U.S. steel industry will likely continue to be unfavorable for the foreseeable future.

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