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Cleveland-Cliffs in prime position after FPT purchase

Highlights

Cleveland-Cliffs moves into scrap market, focus on prime grades

Will handle steel's entire life cycle

Less internal consumption than EAFs but growing

Cleveland-Cliffs continues to move the needle in the US steel market, this time with its $775 million acquisition announcement earlier this week of Ferrous Processing and Trading Company (FPT).

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Cliffs, formerly known only for its mining business, has now grown to be the largest flat-rolled steel maker in North America with its acquisitions of AK Steel and most of ArcelorMittal USA – and is now moving into scrap.

The company's jump into scrap appears to have a very specific purpose, positioning itself to control a significant portion of prime scrap in the US.

In its investor presentation, Cleveland-Cliffs noted that FPT is the largest processor and distributor of prime ferrous scrap in North America with nearly half its 3 million tons/year of scrap processed in prime grades. This is approximately 15% of the merchant prime scrap market, excluding home scrap, according to Cliffs.

Prime time to focus on scrap

Prime scrap is a key raw material for steel production in electric-arc furnaces (EAFs) and can also be used in basic oxygen furnaces (BOF). The scrap is generated by manufacturers during the processing or production of steel products. It is the cleanest version of ferrous scrap as it never leaves the manufacturing facility like obsolete grades of scrap which are returned to scrap dealers at the end of the life cycle of a product.

The low residuals make it sought after by EAF and BOF steelmakers to produce higher-quality grades of steel.

Demand for prime scrap in the US is expected to boom over the next few years as more EAF capacity comes online.

S&P Global Platts has estimated previously there could be as much as 3.7 million mt/year of additional open market demand once capacity expansions are completed in 2023. The growth would account for 42% of all new open market demand generated by new steelmaking capacity.

These estimates failed to include the recently announced combined 6 million st/year of additional EAF sheet mills announced by Nucor and US Steel with startups likely by 2024. In addition, another 600,000 st/year of EAF capacity was announced by Nucor for one of its existing bar mills in the western US.

Cliffs also said prime scrap supply has been shrinking in the US for the past 50 years, due to the offshoring of manufacturing and overall improvements in yields during production.

Steel to scrap, scrap to steel

The company's acquisition also positions Cliffs to have control of steel's entire life cycle. Multiple market sources have said FPT has a large share of the automotive industrial scrap accounts. The automotive market accounted for 45% of Cliffs' net sales in 2020, according to its annual report.

Some sheet-market participants have said this could become an additional negotiating tool for the company with automotive customers as they supply the coil, but also would now be responsible for moving the prime scrap as well. The company itself stated it provides a "compelling scrap offtake proposition for the OEM."

Disparity between finished steel, scrap prices

The integration of a scrap company into Cliffs' portfolio differs somewhat from the previous moves by Nucor and Steel Dynamics to acquire their raw materials arms. Both steelmakers are solely EAF-based and consume the most scrap of any two steelmakers in the US. Cliffs only has a handful of EAF-based mills with most of the former AK Steel and ArcelorMittal USA mills using the blast furnace/BOF configuration.

One similarity with the acquisitions may be the timing. Cliffs' announced acquisition of FPT comes as steel prices remain near all-time highs. SDI and Nucor both made their acquisitions in Q4 2007 and Q1 2008, respectively, when prices were approaching their previous all-time highs.

Still, Cliffs has a home internally for some of the prime scrap FPT handles. Its own demand became apparent this month as Cliffs reached into the scrap market in different Midwest regions buying prime grades for its BOFs ahead of the more typical buy-week activity in the scrap market, usually led by EAF producers.

The move left some scrap market participants surprised as they were traditionally limited in prime scrap buys in the region.

Cliffs looks to be poised to capture the growth in demand for prime scrap for third-party sales as well as maintain levels for internal consumption. Still, there remains the disparity between finished steel prices and scrap prices with gains in coil prices far outpacing gains in scrap.

Mill spot prices for hot-rolled coil ballooned to record highs throughout 2021. No. 1 busheling scrap prices also increased, but at a noticeably more modest pace. The situation was similar in 2018 following the implementation of 25% tariffs on finished steel imports, but less pronounced.

As the new wave of capacity ramps up at the start of 2022 and more US EAF capacity continues to be built over the next three years, it seems expected demand should push scrap prices higher.