What Next for ThyssenKrupp?

No one in the industry believes ThyssenKrupp AG will receive anything close to the $4.5 billion.  SMU sources have told us the offers out of CSN and potentially ArcelorMittal for the Calvert, Alabama operations were around $1.5 to $1.6 billion. After months of negotiations we have heard that CSN, who has been the lead bidder for quite some time, may have recently revised their offer to a lower number.

Our understanding is the biggest issue in the CSN/TK negotiations is not the Calvert operations but the approximately 3 million metric tons of slabs needed from CSA as part of the sale agreement. CSN is not able to provide slabs out of their existing operations and would have trouble buying the Calvert operation without a secure source of slabs over an extended period of time.

Industry analyst Charles Bradford of Bradford Research told SMU that the real issue is the supply of I.F. and other automotive grade slabs in order to supply automotive companies such as BMW and Mercedes.

A second issue is being able to convert slabs into hot rolled coil and other downstream products that allows a profit.  “The deal only makes sense if the purchase price allows for the company to be able to convert slabs into HRC at a cost (including capital costs) that allows a profit. The average export price of slabs from Brazil to the U.S. was $595.50 a tonne last year ($540 a net ton) FOB while the average U.S. HRC market price in 2012 was $655 a net ton. This spread would be inadequate since if much of anything was paid for the plant, in my opinion. The conversion cost alone might be close to $100 without capital…”

Now the industry is full of rumors of other interested parties or that ThyssenKrupp AG may keep the mills.

ThyssenKrupp AG CEO Heinrich Hiesinger told German newspaper WAZ this past week, “We will only sell our steel plants if the disposal conditions ensure a more sustainable solution than the continuation of Steel Americas as part of our company.”

Customers of ArcelorMittal USA have been telling Steel Market Update that their AM sales people are expressing confidence that AM will ultimately be the buyer of the Calvert, Alabama operation. To the best of our knowledge none of the AM sales people are involved directly in the negotiations.

Charles Bradford when asked about a potential purchase of the Calvert operation by ArcelorMittal told us, “They were the logical buyer from day one. ArcelorMittal has the slabs needed to run the operation. They also have the auto market. They are not going to get another opportunity to buy an asset like this.”

However, he went on reiterate his comments regarding the costs of slabs and converting slabs and said of ArcelorMittal, “If ArcelorMittal could be assured that they would get a premium price for IF grade coils, the deal could be doable, but only if the downstream products can also be sold at a profit.”

Bradford went on and told SMU he is not sure ArcelorMittal will be allowed by the Justice Department to buy the TK Calvert operation without divesting itself of another one of the U.S. plants. However, the Justice Department “blew” the forced sale of Sparrows Point which resulted in the loss of thousands of jobs when RG Steel went out of business. Mr. Bradford told us, “Another issue would be who would want to buy whatever plant the Justice Department might want sold. US Steel is in the selling mode and Nucor won’t touch anything with a union. I also doubt it if Severstal would want (or be allowed) to buy another asset after a DOJ forced sale considering what happen at Sparrows Point.”

Bradford told us if AM were forced to sell an asset like Burns Harbor the deal probably would not make sense as right now that is one of the company “jewels.” He thought that the best option is a joint venture between a Japanese mill like Nippon Sumitomo and ArcelorMittal. A joint venture partner may erase the need by AM to sell off one of their plants and the Calvert mill could be fed by both AM and Japanese slabs (or they can buy the cheapest slabs possible on the open market).

He told SMU that ArcelorMittal, “May have no choice but to buy the TK USA plant. The last thing they want is CSN disrupting the domestic market.”

On Friday the Wall Street Journal published an article about ThyssenKrupp AG potentially selling the Calvert operation and keeping the Brazil plant with the intention of building some form of “processing” plant in Brazil. We think what the WSJ was actually saying is TK and their partner Vale would build a rolling mill in order to convert the slabs to hot rolled or potentially other upstream products.

Sources with knowledge of the Brazilian markets have told us adding more money to the CSA plant by building more capacity (rolling operation) makes no sense.  Brazil is essentially an exporter of steel and does not need more rolling capacity.

As the CSA mill stands now it is believed the mill needs somewhere between $600 million to $1 billion to repair issues at the facility. We surmise that this is the main reason why CSN and potentially other mills do not want to directly own the plant.

Building a rolling mill at CSA would require approximately another $1 billion.

The one company which is in need to slabs is Ternium.  However, they walked away from the negotiations very early on saying the numbers being requested did not make sense for their company. With few to no offers on the CSA mill can TK tempt Ternium to return to the table?

Steel Market Update expects the rumor mill to be working in full force between now and when ThyssenKrupp holds their end of year conference call with analyst which is scheduled for November 14, 2013. ArcelorMittal will be the first of the company’s mentioned to report results and their conference call is scheduled for November 7th while CSN is schedule to release their earnings on November 12th.