Consolidation may be coming to the US steel industry.
Ina Fassbender/AFP via Getty Images
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Investors should prepare for volatile trading in steel stocks to start a new week. Steel company built by Andrew Carnegie
JPMorgan
You may not be independent for much longer.
Sunday,
United States Steel
(Stock ticker: X), the steelmaker founded by Carnegie and Morgan in 1901, announced it was exploring strategic alternatives after receiving “multiple unsolicited proposals.” Many organizations are looking to invest in or acquire a steelmaker.
“This decision comes on the heels of the company receiving numerous unsolicited proposals that ranged from the acquisition of certain production assets to consideration for the entire company,” said CEO David Porritt. New release. “The Board is taking a measured approach to considering these proposals, including seeking further information in order to evaluate initial proposals that are subject to ongoing due diligence and review.”
It appears that one of the proposals from
Cleveland Cliffs
(CLF), which on Sunday announced a proposal to buy
US Steel
for $17.50 a share and 1,023 Cliffs shares. The proposal values US Steel stocks at about $35 a share. US Steel shares closed Friday at $22.72 per share.
Cliff CEO Lourenco Goncalves said New release. “The US Steel Board of Directors has rejected our offer, calling it unreasonable. As such, I believe it is now necessary to make our proposal public to help accelerate a substantive engagement between our two companies.”
Goncalves built Cliffs into the largest producer of flat rolled steel in North America with the acquisition of AK Steel and the North American steel operations of
Arcelor Mittal
(MT). Flat products become things like car doors and filing cabinets. Long products are things like structural beams and rebar.
At $35 a share, US Steel, which includes equity and net debt, would be worth roughly $10 billion, or about $670 per ton of cargo. US Steel was valued at about $11 billion in March when steel prices were higher. The Cliffs project is valued at approximately $13 billion, or $800 per ton shipped. Cliffs is worth a little more than that, but both companies reported about $3.8 billion in earnings before interest, tax, depreciation, and amortization, or Ebitda, on average over the past two years.
The combination of Steel-Cliffs in the US will create a company with a production capacity of approximately 30 million tons of shippable steel with significant assets in iron ore and coal. This would be the largest in America, according to data from the World Steel Association. It will be number two
Nucor
(NUE).
Nine of the 15 largest steel companies in the world are Chinese companies. China produces more than half of the 2.1 billion metric tons of steel produced annually worldwide. The United States produces about 100 million tons and is a net importer of finished steel products. Being a net importer means that the price of steel around the world determines the price that American producers can charge.
Consolidation in the domestic industry can help producers better match supply and demand and achieve higher profit margins.
Investors may welcome consolidation. Heading into the week, US steel stocks are down about 9.3% this year and down about 10% over the past 12 months. Cliffs stock is down about 9% so far this year and is down about 25% over the past 12 months.
Steel stocks are battling falling steel prices. Benchmark steel prices enter the week at around $750 a ton after peaking at around $1,300 a ton in March. A year ago, steel prices were around $800 a ton.
Write to Al Root at allen.root@dowjones.com