ThyssenKrupp Americas Bids May be Lower than Expected

We rarely hear prospective buyers, or the analysts who follow these companies, speak of value or synergies that the TK facilities would bring to existing operating plants. Instead we hear the words “strategic” or “protection of market” used when analysts or those within the industry are speaking about the potential acquisition of the ThyssenKrupp Americas assets.

The one exception might be Ternium which is building a number of new rolling mills in Mexico and is already slab short and a major buyer of slabs on the international market. At the right price, the CSA slab mill in Brazil may make sense if the cost to maintain/repair the facility is not too high.

ThyssenKrupp SA, the parent company of the Steel Americas plants, may be in for a surprise similar to how the RG Steel people must have felt when not one steel mill bid on their facilities at auction.

This is not to say the facilities are without value – Steel Market Update has been to the ThyssenKrupp Steel USA plant in Calvert, Alabama on a number of occasions and the equipment there is excellent. The question really becomes, can the mill be run by a new owner and make a reasonable return on their investment?

Charles Bradford, steel analyst and the head of Bradford Research, in a note to his clients reported “…we believe that this plant [Calvert] has essentially no value as an operating entity.” Mr. Bradford then provides the details behind his assertion with the following:

“Whomever buys the plant will have to get semi-finished steel (high grade slabs) to feed the rolling mills. Over the last many years (we have data back more than 30 years) there has been an active international market for slabs, which often sells at a price between $70 to $100 less than the price of hot rolled coils, all in. Thus any purchaser, even if they have slabs of their own (such as ArcelorMittal and maybe U.S. Steel) have an alternative to sell the slabs at the world market price. The cost of imported slabs delivered to the U.S. from Brazil in December was $477 a net ton (plus delivery to the mill and handling) and the average hot rolled coil price was about $633 in December, but the imported slabs need to delivered to the rolling mills or the product from Calvert, AL needs to be shipped to their customers at possibly a $30 a ton cost.

We believe that the costs of heating, rolling and selling the slabs into hot rolled coils (including cost of working capital) totals more than $100 a ton, excluding the capital cost of the acquisition. It costs about $20 a ton (can be as little as $15 if blast furnace gas is used which the TK plant doesn’t have) to reheat slabs and a further $25 a ton to roll the slabs. There is a 4 to 5% yield loss (about $25 a ton assuming a $500 a ton slab cost) and 3 to 4% for selling and administration expense. Furthermore, two months of slabs will need to be kept in inventories and there may be a cost to cover the account receivables (although this can be offset by the delay in payables). Thus there is nothing left of the $100 spread to cover the cost of whatever was offered for the plants. Even with a 7% cost of capital, a $1.5 billion bid would incur an expense of about $25 a ton assuming an 80% operating rate, which may be optimistic.”

One item the industry needs to remember is the ThyssenKrupp plant in Calvert, Alabama was never constructed with the idea it would be sold to another mill. The Calvert plant is capable of rolling 5.2 million tons of slabs – that is a lot of slabs. The mill was built to roll high end product – using high end slabs such as IF for automotive parts. There just isn’t a lot of excess IF unused capacity close to Calvert, Alabama. Rolling commercial steel slabs for the resale market is not a long-term winning proposition for a mill of this quality.

The industry should not be surprised if the offers come in lower for TK Americas (Alabama and CSA in Brazil) than the original non-binding bids.

In Brazil there are questions regarding how much money it will cost to fix some of the structural issues which we understand exist at the mill. There is only one bidder just for the CSA mill by itself – Ternium – and the analysts who follow Ternium are hoping they don’t get the facility as they believe it will be a negative drag on their earnings. However, in reading the Ternium earnings transcript from this week it is apparent they have a need for slabs. “…we are a big buyer of slabs in the world market, maybe the largest worldwide….” Later in the call they discuss their need for slabs in the Mexican market where they have a number of flat rolled mills under construction. Ternium is going after CSA without partners.

CSN is bidding on both CSA and Alabama – it is not yet known if they would be willing to separate out one from the other (buy one without the other). Everyone else is bidding on the Calvert operation (USA) without the Brazil plant.

Bids – CSN reportedly bid $3.8 billion (non-binding) for everything. The top bidder for Alabama alone was reported to have been ArcelorMittal at $1.6 billion with a couple of mills right behind at $1.5 billion (non-binding and before their joint ventures). The analysts with whom we speak do not believe the TK facility will sell for more than $2 billion and, looking at the analysis provided by Mr. Bradford, that could be too high a price in this market.

If there is a bid at or higher than $2 billion, it most likely will happen if there are two mills who are highly motivated and truly see strategic value and the potential to add to their bottom line. With AM and USS this might mean being able to shut existing antiquated North American operations. For CSN it is the opportunity to break into the U.S. market in a big way. For all of the U.S. companies it is being able to control a “wild card” operation and perhaps pricing. Binding bids are due by the end of this week.