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Severstal sale stirs more AK questions

Keywords: Tags  Severstal, Dearborn plant, Columbus mill, Steel Dynamics, SDI, AK Steel, Jefferies, Cowen Thorsten Schier


NEW YORK — Steel market analysts largely agreed with initial market sentiment that Steel Dynamics Inc.’s (SDI’s) purchase of OAO Severstal’s Columbus, Miss., facility is a slam dunk, while more questions surround AK Steel Corp.’s acquisition of the Russian steelmaker’s Dearborn, Mich., mill.

Analysts at New York-based Jefferies LLC said the strategic rationale for both deals was "sound" due to increasing geographical and product diversity for SDI and improved operational flexibility and logistical improvements for AK Steel, but they noted the AK Steel deal poses risks in the form of potential antitrust concerns and financing issues.

"With virtually all integrated North American auto steel capacity held by four players, the consolidation of Severstal Dearborn by AK Steel could trigger a deeper investigation into potential antitrust issues by the Department of Justice, which could prolong or prevent the announced deal from closing," Jeffries analysts Luke Folta and Martin Englert said.

West Chester, Ohio-based AK Steel’s "already highly levered balance sheet" and other market factors could prevent it from receiving permanent financing, "which is a risk for all parties," Jeffries analysts said.

The comments echoed concerns raised earlier in the week, which had also included AK having to overcome quality issues that have plagued the Dearborn facility (amm.com, July 21).

Fort Wayne, Ind.-based SDI’s chances of managing leverage from the deal remains strong even if steel markets take a turn for the worse, while AK might have more trouble under such a scenario, Jefferies analysts said.

SDI’s Columbus buy is contingent on AK closing the Dearborn transaction, as per Severstal’s request (amm.com, July 21).

Analysts from New York-based Cowen & Co. LLC named SDI the "clear winner" in the transactions, with domestic flat-rolled capacity utilization in the 85- to 90-percent range.

"We forecast that Columbus will run at a utilization of 82 percent and produce 2.8 million tons in 2015," they said in a July 22 note, but added this was a "conservative view" and surprises to the upside are possible.

Improved product mix should boost profitability for Columbus next year, they added.

For Dearborn, Cowen expects a run rate of about 80 percent in 2015, leading to additional output for AK Steel of 2 million tons and a strengthening of its position in the auto market.

While the facility will also help AK Steel weather "planned and unplanned" outages by which it has been plagued (amm.com, Feb. 25) and is overall a boon for the future of the company, Cowen reiterated financing concerns for AK.

The sale of Severstal’s North American assets should be beneficial for the entire domestic steel industry, they noted.

"We view U.S. Steel Corp. and ArcelorMittal SA as beneficiaries of this transaction, given the additional pricing discipline that we expect the industry to realize," Cowen said.


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