Davis Index: Market Intelligence for the Global Metals and Recycled Materials Markets

Cleveland-Cliffs and AK Steel have been given a B rating and received a positive outlook from Fitch, modified from a negative view, in light of Cliffs acquiring all of ArcelorMittal’s USA operations.


The rating agency has also put Cliffs’ senior unsecured guaranteed notes rating on a positive rating watch on revised recovery assumptions after the attainment of ArcelorMittal USA, including a higher gain in EBITDA led by Cliffs adding about 17mn nt (15.42mn mt) of steelmaking capacity. 


The organization’s assessment included the key assumption that Cliff’s steel shipments will drop considerably in 2020, with recovery projected in 2021 and further improvement expected by 2023 when steel shipments are projected to advance to about 16.5mn nt.


Fitch indicated its positive outlook reflects the belief that the acquisition is creditworthy as Cliffs is reducing debt and broadening its end-market while growing in size. 


Cliffs’ scores indicate its vertically integrated operations, its iron ore autonomy, its efforts to increase steel production, and focus on its electric arc furnace (EAF), hot briquetted iron (HBI) facility in Toledo, Ohio. Fitch views Cliffs as having the means to provide a secure source of demand for iron ore and improved steel pricing benefits due to AK’s contribution.


The steelmaker’s HBI strategy was also observed in the report, as the company plans to become a critical supplier of the material for EAF producers. EAF’s have acquired the market share from blast furnace producers and require higher quality steel production for which, a suitable iron ore based metallic such as HBI will be needed. The HBI can also provide internal benefit to AK Steel and ArcelorMittal USA’s blast furnaces.


The company plans to spend about $1bn to construct its 1.9mn mt in annual capacity HBI plant, set to be completed in Q4 2020. 


Fitch expressed some concerns that include Cliffs’ high contact with the automotive industry, which is projected to be negatively affected by COVID-19, resulting in considerably reduced shipments. Total debt/EBITDA is expected to be raised substantially in 2020 but should improve as the steel industry and economy recovers.


However, Cliffs will now lessen its concentration in the auto market as about 66pc of AK’s sales and 27pc of ArcelorMittal USA’s sales were in automotive in 2019. 


Fitch calculates that Cliffs has satisfactory liquidity and has no substantial maturities due until 2024. However, this is somewhat offset by the likelihood of drastically reduced EBITDA in 2020 along with the assumption of expensive interest and pensions, including $1.47bn in pension or other post-employment benefit commitments from ArcelorMittal USA.

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