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US mills eye debt, downstream rather than capacity expansions as profits rack up

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US mills eye debt, downstream rather than capacity expansions as profits rack up

Highlights

New US steelmaking expansions not in focus

Mills eyeing further downstream capabilities

Cleveland-Cliffs looks to pay down debt

Pittsburgh — With US steel prices at all-time highs and mills starting to report record first-quarter profits and sales, their longer-term focus is on potential downstream projects and reducing debt levels rather than expanding capacity.

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Domestic steelmakers are still in the process of completing capacity expansion projects spurred on by the last boom in 2018, when steel prices spiked to nearly 10-year highs. US hot-rolled coil prices topped out at $920 per short ton in July 2018 on the back of former President Trump's sweeping tariffs on steel and aluminum products.

The temporary runup in steel prices led to a profit windfall for mills in 2018 and a resulting rash of capacity expansion announcements at new and existing locations.

Now, US HRC prices sit more than 55% above those 2018 highs and new quarterly profit records are being hit, but US steelmakers have seemed uninterested new capacity expansions and instead have hinted at growing downstream capabilities as well as reducing debt levels.

Steel Dynamics, one of the earliest US steelmakers to announce first quarter results last week, hit multiple operational and financial records for the quarter. It is also one of the mills still in the process of completing a new $1.9 billion mill announced in 2018. The company expects the 3 million st/year to start making shipments in the fourth quarter.

SDI's CEO Mark Millett said during the company's earnings call that he thought any additional organic growth on the steel production side was off the table. "Downstream coating, value add, there's still I think a myriad of opportunities for us," added Millett.

Strategic capability

Still, Millett did not fully commit to walking away from further capacity expansions, but the prospect was unlikely.

The company already has announced plans to invest $400 million-$425 million in four new coating lines, with two located in the Midwest and two located in the South, to support existing mills and new mills.

Nucor, which recorded first-quarter profits of nearly $1 billion and expects any even stronger second quarter, is also still finishing up its new mill and capacity expansions announced in 2018. Its new Brandenburg, Kentucky plate mill remains on track for a late-2022 startup, while the expansion at its Gallatin, Kentucky mill looks ready for an early 2022 ramp up.

Leon Topalian, CEO of Nucor, said his company's strategy isn't "to get bigger by volume. It's to add strategic capability."

Nucor recently announced it would be spending $164 million on a tube mill near its Kentucky sheet mill.

One of the most aggressive companies, Cleveland-Cliffs -- which has only been a steelmaker since 2018 following its acquisitions of AK Steel and most of ArcelorMittal USA's assets -- is focused on reducing debt to better position the company for the future.

The company plans to pay off $1.6 billion of its asset-based lending debt balance by the end of the year, and CEO Lourenco Goncalves said that it would continue to reduce debt elsewhere instead of refinancing.

"I will continue to pay down debt. So, we want to be debt-free. Yes, I want to be debt-free because you know what? I don't know if one day you're going to have another COVID. I don't know what's going to happen next. What I know is that if I have my footprint, producing 17 million tons of steel a year, producing $4 billion plus of EBITDA here, debt-free, I'm good," Goncalves said on the company's Q1 call.

He said the company has laid out through 2022 on what tranches they are going to take down and when, all with cash.

Goncalves did not rule out further chances for acquisitions but said "it takes two to dance" and that he currently has no acquisition targets. "I have nothing on the horizon right now. My focus is 100% on paying down debt and eliminating debt and creating equity."