Reaction to the Severstal Sale of Dearborn and Columbus

SDI Columbus

Steel Market Update is of the opinion that the addition of Columbus and their 3.4 million tons of production will be a great fit for Steel Dynamics. SDI purchased the newest, most modern operating mini-mill (EAF) in the country for $1.625 billion. To put that into perspective, Big River Steel (BRS) is breaking ground on their 1.6 million ton mini-mill which is projected will cost $1.3 billion to build.

The new facility puts Steel Dynamics firmly into the South with a mill capable of producing hot rolled coils out to 76”, cold rolled to 74” and hot dipped galvanized out to 72” widths. The mill puts SDI into the automotive markets, appliance and pipe & tube as well as deeper into the Southern service centers and into the Mexican market.

With the acquisition Steel Dynamics becomes the 4th largest steel mill in the United States with 11 million tons of capacity.

Mark Millett, CEO of Steel Dynamics was asked by one of the analysts during the SDI conference call announcing the purchase of Severstal Columbus if they were concerned about Big River Steel being built in the same region as the Columbus mill. Mr. Millett explained their cost structure and then said, “When you are the lowest cost producer well, to be honest we’ll take anyone on.”

What the purchase does not do is deal with the substrate issue for The Techs and their three conversion mills located in the Pittsburgh, PA area (The Techs are owned by SDI). This has become an issue in tight markets as The Techs are tied to US Steel and other mills for the majority of their substrate needs.

AK Steel Dearborn Works

AK Steel paid $700 million for the 2.5 million ton plant and its approximately 1400 employees. AK Steel will receive a 100+ year old fully integrated steel mill that has been upgraded by Severstal and now has one of the most efficient blast furnaces operating in North America as it was rebuilt in 2007. Severstal invested $1.4 billion in the plant since they bought the former Rouge Steel out of bankruptcy for $285 million in 2003. The new equipment includes a brand new pickle tandem mill and automotive quality hot dipped galvanizing line both completed in 2011.

AK Steel also receives in the transaction: 100 percent ownership in Mountain State Carbon which is a coke-making facility, 50 percent ownership in Double Eagle Steel Coating, 48 percent ownership in Spartan Steel Coating and 49 percent ownership in Delaco Processing.

AK Steel believes the synergies between their existing steel mills and the location of their customers will translate into a more efficient and profitable mill.

AK Steel CEO, James Wainscott pointed to the much higher percentage of secondary produced at Dearborn than at AK’s existing facilities as one area where they believe they can make changes. He pegged AK secondary as 2 percent while Dearborn is “a multiple of that.”

The Dearborn rolling mills have the ability to produce 3.6 million tons of hot bands, 2.1 million tons of cold rolled and 1.1 million tons of hot-dipped galvanized.

What the deal does not address is the fact that the existing AK Steel mills and the Dearborn facility are slab short.

Customer Responses

An executive with one of the largest service center groups in the United States told SMU, “With all market items staying the same, a concentration of ownership should allow prices to be higher than they would be.

“In the case of the Detroit market, AK buys a significant competitor.  Similar to Severstal Dearborn, much of AK’s business is focused on automotive.  This should have an immediate influence on spot business, and then again on contract business as they come up for revision.  And, both mills rely on very old hot strip mills to support a complex supply of downstream products.

“In the south, SDI and Severstal do not have the same relationship.  Here SDI will take over additional EF capacity in a state-of-the-art mill.  SDI is well versed in selling out production over a wide geography requiring managing freight costs.  They will face the same issues as the marketing team of Severstal, and this should mean a more muted affect on the southern market than the sale in Detroit.”

A large manufacturing company also spoke with SMU on the subject. They did not believe the sale would have any impact on their business as they are close to all of the companies involved. “I don’t think there will be any impact in the short term.  I think AK may get more disciplined because they will have more downstream opportunities and thus less HR to sell.  This always seems to be the product that they dump.”

The manufacturing company executive told us that SDI in the south would be forced to compete against Nucor as the Columbus plant is surrounded by Nucor facilities. “They will need to stay competitive with Nucor otherwise their robust hot rolled capacity will be sitting idle.  Nucor isn’t going to let SDI roll into the south without a fight either.  I think things will get very interesting later this year for price negotiations.”

Steel Market Update asked the manufacturing company what are the biggest positives associated with the sale and the biggest disappointments in their opinion? “The biggest positive to me is the right people ended up with the right facilities.  SDI is a great company and the people in Columbus are great people.  Together I think they will really make things difficult for Nucor.  It might even be enough to get Nucor more focused on their steel making business and worry less about what Correnti is doing.  My biggest disappointment hasn’t really happened yet.  If the executive team at SNA (Saikat Dey) leave, which I assume they will, that will be a disappointment.  We need more people like him in this industry.  People that aren’t afraid to change the way things are done even though they have always been done that way.  I also hope they keep the commercial group.  I think they are one of the better commercial teams in the industry.”

A southern based service center was not so keen on the changes. “As a purchaser, I prefer there to be more competition. This takes one more player out of the mix.”

Severstal NA CEO Saikat Dey will be one of the keynote speakers at this year’s SMU Steel Summit Conference which will be held in Atlanta, Georgia on September 3 & 4, 2014. More details can be found on the Steel Market Update website: www.SteelMarketUpdate.com.