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Market cheers SDI move, frets about AK Steel

Keywords: Tags  Severstal, Steel Dynamics, SDI, AK Steel, Christopher Plummer, Metal Strategies, Charles Bradford, Metals Industry Advisory Group John Tumazos

CHICAGO — The sale of OAO Severstal’s U.S. mills to Steel Dynamics Inc. (SDI) and AK Steel Corp. means further consolidation of the domestic market and could lead to more-disciplined pricing, market sources said.

"Consolidation is great—one less rogue mill chasing prices down," a Midwest service center source said.

While sources were optimistic about SDI’s acquisition, concern’s were raised over AK’s move. Reflecting this, SDI’s shares ended July 21 at $20.76 apiece, up 11.7 percent from the previous close, while AK’s shares fell 4.2 percent to $8.46 in the same comparison.

Analysts generally praised SDI’s buy of Columbus as transforming it into one of the biggest mini-mill steelmakers in the country and making it owner of some of the newest steelmaking capacity in the United States.

"In both cases, it’s good for the domestic steel market in that you have good buyers that are existing players in the market and probably would be the least-disruptive owners," said Christopher Plummer, managing director of West Chester, Pa.-based Metal Strategies Inc.

Columbus gives SDI the southern steel presence it has craved for at least a decade without having to boost domestic capacity, he said, and the Columbus facility should benefit from being part of SDI’s wider network of electric furnace steel plants.

"It’s the best flat-rolled mini-mill in the country," Charles Bradford, principal of New York-based Metals Industry Advisory Group LLC, said of the Columbus facility, although he cautioned that it would eventually have to compete with Big River Steel LLC, Osceola, Ark.

Big River Steel is expected to break ground soon on a $1.3-billion flat-rolled mill (, July 1).

However, some market sources said that Columbus also will open up SDI to import competition from ports in Houston and the Southeast to which it was less exposed from its Midwest operations.

"I would expect trade cases to pick up some steam now. Something is coming sooner rather than later on cold-rolled and coated," one steel consumer in the South said. "We’ve already got some traders who have pulled it in and said, ‘Nope, we’re not offering’ it."

Market sources have said trade cases could soon be filed vs. offshore suppliers of cold-rolled and hot-dipped galvanized steel, and Galvalume (, July 17).

The picture of the Dearborn mill is more complicated, presenting both big opportunities and challenges for AK Steel, analysts said, noting that the company would have to overcome quality issues that have plagued the facility, likely without tapping credit markets to put more debt on an already highly leveraged balance sheet.

Analysts also expressed concern about AK’s raw material position, noting that it would have to address an iron ore contract with Cleveland-based Cliffs Natural Resources Inc. that runs into the next decade at well above current market prices.

But the bigger question might be whether it’s a good idea to bet on steel in the automotive market when it is unclear if steelmakers will be able to command a premium for advanced high-strength steels and as some mass-produced vehicles—like the Ford F-150—are boosting aluminum content, Bradford said.

The Dearborn mill supplies steel for the F-150 and is located next to one of its assembly plants, analysts noted.

"Why double down on automotive when the steel industry is likely to lose maybe 20 percent of its automotive business?" Bradford asked. And that 20-percent figure only takes into account volumes likely to be lost through the increased use of advanced high-strength steels and doesn’t include possible losses to aluminum, he added.

Moody’s Investors Services Inc. said in a July 21 note that the transaction, expected to be funded by a combination of debt and equity, will have "no impact" on the steelmaker’s B3 credit rating. “Although the transaction could add some incremental leverage in the near-term, the strategic benefits, as they are realized over the near to medium term, should enable AK Steel to improve its operating performance and strengthen its debt protection metrics from their current weak levels to a level more appropriate for the rating,” Moody’s said.

While SDI and AK Steel continue to battle it out in North America, Severstal might have decided to take its money to greener pastures, according to John Tumazos, principal of Holmdel, N.J.-based Very Independent Research LLC.

The Russian steelmaker has garnered some $3.7 billion, he estimated, including $2.3 billion for the Columbus and Dearborn plants, $140 million from the divestiture of its North American coal assets to Canada’s Corsa Coal Corp. (, July 15) and $1.2 billion gleaned from the company’s 2011 sale of three U.S. mills to Renco Group (, April 1, 2011) in what is the now-defunct RG Steel LLC.

"They’re choosing not to compete with foreign steel, not to pay money for dumping suits and not to compete with aluminum," Tumazos said, noting that U.S. steel prices—contrary to those in much of the rest of the world—haven’t declined in line with iron ore and coal.

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