Bid for US Steel promises national security through consolidation
Cleveland-Cliffs’ $10bn proposal would build scale but raise competition worries
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.
Chinese developer Evergrande files for US bankruptcy protection
Property group’s 2021 bond default triggered sector-wide liquidity crisis in China
Property developer China Evergrande has filed for bankruptcy protection in the US, as the company pursues a prolonged restructuring agreement with international creditors that hold billions of dollars in bonds.
Evergrande defaulted on its dollar-denominated debts in late 2021, sparking a sector-wide liquidity crisis that has weighed on China’s economic growth and put increasing pressure on policymakers in Beijing. The company has about $19bn in overseas liabilities, according to Bloomberg data.
Fellow developer Country Garden, the largest privately owned homebuilder in China which was until recently seen as safer than many of its highly-levered peers, also missed payments on its international debts this month, and investment group Zhongrong similarly failed to repay savings products.
The incidents renewed fears of a slowdown in the property sector, which typically drives more than a quarter of China’s economic activity. The turmoil threatens to spill over to other areas of the economy, just as Beijing is grappling with deflation, weak exports and soaring youth unemployment.
Evergrande, the world’s most indebted developer with liabilities of $340bn, last month unveiled losses of $81bn over 2021 and 2022.
Its bankruptcy filing in a New York court, signed by the company’s foreign representative Jimmy Fong, relies on the so-called Chapter 15 process for foreign companies seeking recognition of their restructuring in the US.
The group is expected to hold meetings with creditors in Hong Kong this month over a restructuring plan proposed in March.
Evergrande had about $20bn in international bonds at the time of its default and proposed providing investors with notes linked to the group’s listed subsidiaries in Hong Kong.
Dozens of Chinese developers have defaulted on their debts since Evergrande’s collapse. Beijing, which launched a deleveraging campaign in 2020 that sought to avoid overheating house prices, has so far stopped short of any major bailout or stimulus and instead sought to complete unfinished projects.
In China, homebuyers often purchase apartments prior to their completion. Data this week showed new home prices fell in July.
Missed payments from Zhongrong, part of a so-called trust industry that directs trillions of renminbi into investments across the economy, has fuelled concern over the shadow finance sector’s exposure to the struggling property sector.
Zhongrong sued Evergrande last May over an investment of Rmb1.9bn ($260mn), an annual filing of Evergrande’s corporate bonds showed.
After Hours Summary: ROST +5.5%, AMAT +2.3% higher on earnings; FTCH -34.7%, KEYS -7.6%, BILL -4% lower on earnings; DLB +4.8% to join S&P MidCap 400;
- After Hours Gainers
Companies trading higher in after hours in reaction to news: BARK +5.5% (authorizes new $7.5 mln share repurchase program), DLB +4.8% (to join S&P MidCap 400), STAA +3.3% (to move to S&P SmallCap 600 from S&P MidCap 400), GOSS +2.9% (stock offering by selling shareholders), RKLB +2.3% (signs deal to launch an Earth observation satellite), BURL +1.8% (in sympathy with ROST earnings), BLFY +1.6% (authorizes new 5% share repurchase program), NKLA +1.1% (files voluntary recall), LRCX +0.8% (in sympathy with AMAT earnings), TJX +0.7% (in sympathy with ROST earnings), LMT +0.7% (awarded $622 mln U.S. Navy contract), MRNA +0.3% (clinical trail confirms updated COVID-19 vaccine generates robust immune response against widely circulating variants)
- After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: FTCH -34.7%, KEYS -7.6%, BILL -4%, RRGB -1.9%, GLOB -0.6%
Companies trading lower in after hours in reaction to news: MLNK -1.5% (names new chair of board), AGX -0.9% (to proceed on EPC services contract in Ireland), BIG -0.6% (in sympathy with ROST earnings), DG -0.5% (in sympathy with ROST earnings), FIVE -0.5% (in sympathy with ROST earnings), RVMD -0.3% (announces publication describing molecular basis of tri-complex inhibitors), KLAC -0.1% (in sympathy with AMAT earnings), CACI -0.1% (awarded $414 mln U.S. Air Force contract)
Closing Stock Market Summary
The major indices closed on a downbeat note after trading flattish in the early going. Initially, the S&P 500 was holding steady with 4,400 acting as a level of support. By the afternoon, though, a retreat effort had taken root, leading the major indices to close near their lows of the day and below 4,400.
The afternoon selling was orderly and looked consistent with the consolidation mindset that has driven the price action so far this month. Another jump in market rates gave participants an excuse to take more money off the table. The 10-yr note yield rose five basis points today to 4.31%, settling at its highest level since November 2007.
The 10-yr note yield is now up 35 basis points for the month with participants keying on supply matters and incoming data that continue to validate the soft landing/no landing scenario that presumably will keep inflation above the Fed's 2.0% goal and the Fed itself in a higher-for-longer mindset that includes a consideration of raising rates yet again.
This morning's weekly jobless claims data was indicative of a tight labor market, which also contributed to the move in the 10-yr note. Claims dropped to 239,000 from 250,000 last week.
Mega caps were relative underperformers, pressured by the jump in rates, but many stocks came along for the downside moves. Decliners led advancers by a 5-to-2 margin at the NYSE and a 2-to-1 margin at the Nasdaq. The Vanguard Mega Cap Growth ETF (MGK) fell 1.1% and the Invesco S&P Equal Weight ETF (RSP) fell 0.8%.
Dow component Cisco (CSCO 54.73, +1.77, +3.3%) was a winning standout after its earnings report while fellow Dow component Walmart (WMT 155.69, -3.57, -2.2%) logged a decline after its earnings report.
Only one of the S&P 500 sectors registered a gain -- energy (+1.1%) -- while the consumer discretionary (-1.6%) and consumer staples (-1.0%) sectors saw the biggest declines.
- Nasdaq Composite: +27.2% YTD
- S&P 500: +13.8% YTD
- S&P Midcap 400: +5.8% YTD
- Russell 2000: +5.0% YTD
- Dow Jones Industrial Average: +4.0% YTD
Reviewing today's economic data:
- Weekly Initial Claims 239K (consensus 240K); Prior was revised to 250K from 248K; Weekly Continuing Claims 1.716 mln; Prior 1.684 mln
- The key takeaway from the report is that initial jobless claims -- a leading indicator -- are pacing at levels that are indicative of a tight labor market, which is indicative of an economy that isn't pacing for a hard landing.
- August Philadelphia Fed Index 12.0 (consensus -9.0); Prior -13.5
- July Leading Indicators -0.4% ( consensus -0.4%); Prior -0.7%
Vipshop (VIPS), Deere (DE), Estee Lauder (EL), and Buckle (BKE) report earnings ahead of tomorrow's open.
There is no U.S. economic data of note on Friday.