Iron pellet producer, Cleveland-Cliffs, has entered a definitive agreement for the acquisition of all ArcelorMittal US operations.

Cleveland-Cliffs to become leading player in the US steel industry

The acquisition will be transformative for Cleveland-Cliffs, who will gain access to attractive high end markets with a particular focus on the US automotive industry. Prior to the acquisition, ArcelorMittal accounted for 50% of Cleveland-Cliffs’s product revenue.

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The company’s new scale and industry footprint will allow the company to make cost improvements and optimise its assets. With both companies already engaged in a strong relationship, they display high synergistic potential, which will help their integration.

Cleveland-Cliffs delivered 5.3mm tonnes of flat-rolled steel in 2019. When combined with Arcelor Mittal the group would have produced 16.5mm tonnes, making it the largest producer of flat-rolled steel in North America.

In 2019, ArcelorMittal USA generated revenues of $9.9bn, significantly higher than the $1.99bn generated by Cleveland-Cliffs.

Cleveland-Cliffs first entered the US steel industry in March 2020 after it completed the acquisition of AK Steel Holding Corporation. The purchase of AK steel created a vertically integrated iron ore and steel company.

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ArcelorMittal will diversify business with equity considerations

The nature of the deal allows the world’s largest steel maker to consolidate and diversify its business in the US and become less vulnerable to volatility in the steel industry.

Under the conditions of the agreement, ArcelorMittal will receive an equity value consideration of $1.4bn, including a $505m upfront cash payment and the rest paid in in the form of equity.

ArcelorMittal will receive 78.2 million shares of Cleveland-Cliffs common stock equating to 16% share in the company. The company will also receive Non-voting Preferred Stock with an approximate value of $373m. ArcelorMittal plans to use its minority shareholding to participate in the future value creation.

The US Steel industry demonstrates resilience during pandemic

During 2020, the Covid-19 pandemic caused car manufacturers to shut down plants, causing demand for steel to plummet. According to the federal reserve, Motor Vehicle Assemblies produced just 3.6 million units during Q2 2020, far lower than an average of 10.88 million units in 2019.

Despite the pandemic, vehicle manufacturers were eager to continue production and car sales remained relatively buoyant. Production has made a strong recovery with 11.94 and 11.26 million units produced in July and August respectively. With the automotive industry expected to account for 27% of Cleveland-Cliffs end market, a rebound in production will help accelerate growth of its new business.

Demand for US steel has grown since a 25% tariff was introduced on foreign steel in 2018. US steel production grew 1% in 2019, representing 5% of total global crude steel production. A growing demand in the US for SUVs has also driven demand for domestic steel makers.