Investors need to prepare for a week of unpredictable trading in steel stocks as United States Steel (ticker: X) explores strategic alternatives following multiple unsolicited proposals. The company, founded in 1901 by Andrew Carnegie and J.P. Morgan, could potentially undergo significant changes in the near future.
CEO David Burritt stated that the company received various proposals, ranging from acquiring specific production assets to considering a complete takeover. The board of directors is taking a measured approach and seeking more information to evaluate these preliminary proposals thoroughly.
As a result of these developments, United States Steel’s stock surged by 21.4% to $27.57 in premarket trading on Monday.
One of the proposals came from Cleveland-Cliffs (CLF), but it was rejected. Cleveland-Cliffs had proposed to purchase U.S. Steel for $17.50 per share and 1.023 shares of their own stock, valuing U.S. Steel stock at approximately $35 per share. However, U.S. Steel’s board found this proposal unreasonable and declined it.
Lourenco Goncalves, CEO of Cleveland-Cliffs, made their proposal public to encourage productive engagement between the two companies after U.S. Steel’s rejection.
Goncalves has successfully transformed Cliffs into North America’s largest producer of flat-rolled steel by acquiring AK Steel and the North American steel operations of ArcelorMittal (MT). The company focuses on manufacturing flat-rolled products like car doors and filing cabinets, as well as long products such as structural beams and rebar.
In response to Cleveland-Cliffs’ rejection, Burritt posted a separate statement and the rejection letter, stating that the board had no choice but to reject the proposal as unreasonable.
Steel Industry Consolidation Potential
By Al Root
The U.S. Steel enterprise is currently valued at approximately $10 billion, or $670 per ton of shipments, at a share price of $35. This value was higher in March when steel prices were at their peak. Similarly, Cliffs, with a value of around $13 billion, translates to approximately $800 per shipped ton. Both U.S. Steel and Cliffs have reported an average annual Ebitda of $3.8 billion over the past two years.
If a U.S. Steel-Cliffs merger were to take place, it would create the largest steel company in America, boasting a shippable steel capacity of about 30 million tons along with significant iron ore and coal assets. The second largest steel company in America is Nucor (NUE), according to the World Steel Association Data.
China dominates the global steel industry, producing over half of the annual 2.1 billion metric tons of steel worldwide. In comparison, the U.S. produces approximately 100 million tons and relies on imports for finished steel products. As a net importer, U.S. producers typically base their prices on the global steel market.
Consolidation within the domestic steel industry could potentially lead to better supply and demand matching, as well as increased profit margins for manufacturers.
Investors may view this potential consolidation favorably. U.S. Steel stock has declined about 9.3% this year and approximately 10% over the past 12 months, while Cliffs stock is down about 9% for the year and roughly 25% over the past year.
Steel stocks have faced challenges due to falling steel prices, with current prices at approximately $750 per ton compared to the peak of $1,300 per ton in March. A year ago, steel prices stood at approximately $800 per ton.
