New York — If you can't beat 'em, join 'em, is the view on US Steel's move to partner up with Big River Steel, from Curt Woodworth, equity research analyst at Credit Suisse.
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He -- like other analysts -- also points out that the deal comes at a weak point in the steel sheet market cycle.
"Given the upcoming 'Sheet Tsunami,' the US spot sheet market is likely to see multiple years of recession-level margins and rationalization of the US blast furnace footprint as new low-cost EAFs (electric arc furnaces) ramp," Woodworth wrote in a note issued late Tuesday.
He added that US Steel's decision to team up with Big River will allow the integrated producer to shut down older blast furnaces, but retain "downstream optionality and avoid likely major environmental shutdown costs." Big River gets a captive buyer of essentially hot-rolled coil substrate and can leverage US Steel's automotive and appliance market expertise, Woodworth said.
Credit Suisse expects US Steel to eventually shut down both blast furnaces at Granite City, Illinois, which produced about 740,000 st in 2018 after being restarted. And after Big River fully ramps up, doubling its output with a Phase II expansion in early 2021, US Steel's blast furnace at Great Lakes, Michigan, with about 825,000 st produced in 2018, is also likely to be shut.
If the blast furnaces do indeed close, Woodworth estimates that US Steel will then have excess iron pellet capacity of about 8 million st.
THREE CORE MILLS
Bank of America Merrill Lynch analyst Timna Tanners also noted in her October 1 equity research report that US Steel was highlighting three core mills, and "suggesting Great Lakes, Granite City, Fairfield and US Europe could be de-emphasized." She added that the company said $250 million of capex could be reconsidered and that it could "leverage" its iron ore.
Tanners has been forecasting about 20 million st of US oversupply of steel over the next few years.
"To offset our glut concerns, some 6 million-7 million st of sheet capacity would need to be shut. Idling Great Lakes and Granite City removes approximately 4 million-5 million st, given one of Great Lakes furnaces was already idled." She said closures incur additional costs and inefficiencies for US Steel, because permanently shutting capacity is estimated to cost at least $100 million at each location.
"In our view, [US Steel] is adding debt with negligible return into a sector downturn, and perhaps a broader cyclical one," Tanners wrote.
EXPANDED, UPGRADED FOOTPRINT
Woodworth noted that US Steel "remains steadfast" in its roughly $1.5 billion in capital expenditure commitments to upgrading its Mon Valley, outside Pittsburgh, and Fairfield, Alabama, operations.
In fact, in a presentation to investors Tuesday, US Steel showed a future-state slide footprinting its raw steel capacity as approaching 22 million st/year in 2021-2022, after it exercises its option to acquire all of Big River -- and still counting current blast furnaces operations.
Arkansas-based Big River found its suitor after more than a year of speculation that it was on the merger and acquisition block when US Steel agreed Tuesday to a joint venture partnership with Big River by purchasing a 49.9% stake for about $700 million in cash, with an option for US Steel to acquire the remaining 50.1% within the next four years. The transaction should close the end of this month.
"The sale should be good for both companies," said Philip Bell, president of the Washington-based Steel Manufacturers Association. "I think it shows that US Steel is pursuing a strategy of adding state-of-the-art technology to its operations, and Big River will be able to share that experience," he added.
"To operate globally, you have to be efficient, you have to be sustainable, and you have to be competitive," Bell said. "I think this sale represents all those things. It clearly shows that US Steel had a keen understanding that electric arc furnaces represent the future of domestic steel production."
US Steel executives explained the move as bringing together "the best of the integrated model with the best of the mini-mill model." From a finished product standpoint, the company has a strong emphasis on advanced high strength steels.
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