Steel Mill Consolidation - Who's Next?

The Gallatin mill produces approximately 1.6 million tons of hot bands through the use of its one electric arc furnace (EAF). The mill actually has the ability to roll up to 2.5 million tons of hot band by adding a second EAF which steel analysts are telling SMU can be done for about $100 million.

We understand that CSN, once again left out of the Severstal sweepstakes and desiring to expand in the United States (or at least cover their substrate needs for their Terre Haute, IN plant), will be bidding on the Gallatin mill.

Value estimates range from $700 million to $1 billion for the Gallatin steel mill.

In a note to her clients, metals and mining analyst Timna Tanners of Bank of America Merrill Lynch makes the point that U.S. Steel and Nucor could be involved in the bidding process for Gallatin or other steel mill assets that may come on the market. She told her clients, “…We think one of the larger existing players mentioned above would want to keep CSN out as a more disruptive external market participant. Nucor had $1.25B in cash and short-term investments and U.S. Steel had $1.1B as of Q114.” Later in her note she stated, “The advantages of M&A have been brought to light this week, and we think this calls to attention in particular the optionality Nucor has with its healthy balance sheet. It also supports our enthusiasm over ATI’s ability to toll out half of its new state-of-the art rolling mill, as its partner avoids start-up risks and benefits from greater value-add production for growing thin-gauge needs. STLD could conceivably participate in further consolidation but we assume it focuses on integrating the Columbus deal for now. Other deals could be possible, for example, if Russian-based producers Evraz, TMK, NLMK also opt to exit the U.S. market.”

Something to think about: SMU sources are telling us that Nucor still has the cold mill purchased and moved from the former Sparrows Point plant. The cold mill is intact and could be moved to a new location such as Gallatin if it made commercial sense.

A second point that needs to be understood is Nucor owns 50 percent of Steel Technologies which has a pickle facility and pickles coils off the Gallatin mill.

So there are a number of reasons to look beyond CSN and at Nucor as a strong candidate to acquire the Gallatin mini-mill (or other mills). Nucor CEO John Ferriola in their earnings conference call held on Thursday afternoon stated that they would rather buy than build new facilities…

The other question we are hearing in the marketplace is what about US Steel? They have been quiet or absent from the consolidation process. Will they participate in a Gallatin or other facility that might come up for sale in the relatively near future?

We welcome your thoughts which you can send to: info@SteelMarketUpdate.com.