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What Severstal’s Sales To AK Steel, Steel Dynamics Mean For US Steel

By MetalMiner CommoditiesJul 23, 2014 02:37AM ET
www.investing.com/analysis/what-severstal%E2%80%99s-sales-to-ak-steel,-steel-dynamics-mean-for-us-steel-220316
What Severstal’s Sales To AK Steel, Steel Dynamics Mean For US Steel
By MetalMiner   |  Jul 23, 2014 02:37AM ET
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Oh no! Because of the continuing disasters in Ukraine – lately the tragic shooting down of Malaysia Airlines flight MH17 – tough US sanctions on Russia are directly causing Russian companies, such as steel producers like OAO Severstal - ao (MCX:CHMF), to get out of the US for fear of losing access to Western capital markets. Right?

Not so much.

Although the backdrop of the MH17 tragedy and strained US-Russia relations doesn’t help, Severstal’s impending sale of its North American steel plants in Dearborn, Mich., and Columbus, Miss., to AK Steel (NYSE:AKS) and Steel Dynamics Inc (NASDAQ:STLD), respectively, has been in the works since 2013. Despite Severstal’s North American operations having been touted as some of the most efficient in the world, they still can’t compete with a stagnant global (especially US) steel market and low steel prices.

Hence, Severstal, like many other producers, is looking to shed costs.

But what does it mean for the US steel industry? And for steel buyers?

Raw Steels Chart July 2014
Raw Steels Chart July 2014

First, What’s Happening in the Steel Markets

The answer is nothing much, which isn’t a great thing for producers and sales. According to the American Iron & Steel Institute (AISI), as of July 14, 21 percent of the US steel industry’s capacity was unused, as cited in a Bloomberg article. As MetalMiner has covered extensively, US steelmakers have also fought a succession of legal battles to curb cheap imports. (Severstal is among several Russian HRC producers that could get slapped with huge anti-dumping duties.)

Although AISI reported this month that shipments by US steel mills were 40.5 million tons in the first five months to April this year, up 2.2 percent from 39.6 million tons in the equivalent period of 2013, according to the FT, steel prices are not shooting up just yet.

MetalMiner’s lead forecasting analyst Raul de Frutos is taking a wait-and-see approach to his steel market outlook. “A recent recovery in China, thanks to support from some stimulus measures taken by its government, might give support to steel prices this year,” Raul wrote earlier this month in our Monthly MMI Report. “It is hard to tell if this stimulus will be able to make the Chinese economy reach its pre-crisis level. Since we don’t see any particular event that could boost demand for steel this year, we would expect our steel index to move together with the base metal sector.”

What AK Steel, Steel Dynamics Get in the Deal

From a production perspective, AK Steel gets to operate Severstal’s Dearborn, Mich. rebuilt blast furnace, among the most efficient and productive blast furnaces in the world for its size, and which also began operating a new pickle line tandem cold mill and a new hot dip galvanizing line in 2011, according to a press release. The acquisition will eventually increase AK’s total shipments to more than 7.5 million tons.

For its part, Steel Dynamics gets one of the only North American flat roll mills to have 76-inch-wide hot roll, 74-inch-wide cold roll, and 72-inch-wide galvanized sheet capabilities. SDI’s shipping capacity would eventually be 11 million tons.

What This Means for Steel Buyers

In a quick electronic chat with MetalMiner Editor-At-Large Stuart Burns across the pond, we determined that the takeaway here is less-than-ideal for the buy side of the US steel market as a whole. If, as seems likely, the plants’ sale to AK Steel and Steel Dynamics is finalized, Stuart said, then it’s probably not a great development – we may see less competition, more market oligopoly for the big boys, and higher prices for consumers (these scenarios would certainly be worse if even bigger producers, e.g. ArcelorMittal or US Steel Corp., were to buy up these plants).

With Severstal, Stuart noted, we’re seeing the “classic case of buying at the top of the market, just like Rio Tinto buying Alcan prior to the crash. Paid too much, put themselves heavily into debt and got left with loss-making plants in the downturn.”

What do you think this means for the US market? Leave us a comment below!

by Taras Berezowsky

What Severstal’s Sales To AK Steel, Steel Dynamics Mean For US Steel
 

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What Severstal’s Sales To AK Steel, Steel Dynamics Mean For US Steel

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