Cliffs Says It's Well Prepared for Post-COVID Recovery

Cliffs took a number of measures to protect workers and align production with demand during the quarter. Low demand due to automotive manufacturing shutdowns resulted in the idling of production at Dearborn works and at Precision Partners plants, curtailing AK Tube production, and extending an outage at the EAF at Mansfield Works. AK Steel’s metallurgical coal mine was permanently shut down and North Shore and Tilden iron ore mines were temporarily idled.

Most operations at AK Steel will resume except for the Dearborn hot strip mill that was performing under par before the health crisis, said Goncalves. Dearborn Works should be viewed as two separate facilities: a hot end to produce slabs and a best-in-class finishing facility. Dearborn slabs will be transported to Middletown, and hot rolled coils from the Ohio strip mill will then be transported back to Dearborn for finishing.

“We estimate this improvement will save us several million dollars in annual costs, even after considering the addition of freight to move slabs and coils between the two plants,” said Goncalves.

Going forward,  AK Steel will have the following plant configuration:

• a fully-integrated steel mill in Middletown, Ohio;
• two electric arc furnace steel mills in Butler, Pa., and Mansfield, Ohio;
• one slab-producing plant in Dearborn, Mich.;
• two steel finishing plants, primarily dedicated to automotive carbon steels and other high-value-added applications, in Rockport, Ind., and Dearborn, Mich.;
• two finishing plants dedicated to stainless and electrical steels located in Zanesville, Ohio, and Coshocton, Ohio.
• two electric resistance welded (ERW) plants dedicated to the production of tubular components for automotive and other high-end applications, operating as AK Tube LLC in Walbridge, Ohio, and Columbus, Ind.;
• and 10 plants providing engineered hot and cold stampings and assemblies for the auto sector operating as Precision Partners, Inc., situated in Canada across the board from Detroit, in Kentucky, and in Alabama.

The temporary idling of iron ore operations allowed Cliffs to work through inventory to benefit working capital. “Due to the timing of the crisis hitting at the end of the winter, our blast furnace clients were in serious need of pellet for inventory replenishment, even if their immediate intent was to keep their blast furnaces on idle,” said Goncalves. “With that, our sales to our two major third-party pellet customers, ArcelorMittal and Algoma, have actually persisted at a healthy rate since the Great Lakes reopened at the end of March.”

Construction at the Toledo HBI plant was paused and is expected to resume in the second half of the year. A safety plan to protect construction workers has been formed; once workers are back on the site, completion should take three months, the company said.

“With the extended outage of the entire automotive industry, there has been no busheling scrap generated in our country. This unprecedented fact has tightened the market considerably, and we now believe that the actual demand for our HBI will be even better than the good demand we were anticipating before the pandemic,” said Goncalves. Cliffs anticipates average pellet pricing per ton will be in the low $90s.

Automotive is returning to production and AK Steel is already seeing orders coming in, said Goncalves.

“Make no mistake, the automotive business in this country will recover, particularly with the new trend generated by the coronavirus pandemic against the previous widespread use of ride-sharing service providers and back in favor of privately owned vehicles. As private cars are perceived rightfully so as sanctuaries safe from infection, driving their own vehicles is what millennials want to do now. Car ownership is trending again, and that includes SUVs and pickup trucks, which consume a lot of steel produced by AK Steel and a lot of parts supplied by Precision Partners and AK Tube. April sales volume was not nearly as bad as we initially expected, and there has been significant growth in car sales being consummated online without the buyer even visiting our car dealers’ showrooms.”

Goncalves was pleased with the initiation of the Section 232 investigation on electrical steels. As the only producer of grain-oriented electrical steel in the U.S, AK Steel profitability and the jobs of 1,450 employees have been threatened by the circumvention of GOES products through Mexico and Canada.

“At this point, we believe it’s abundantly clear in Washington, D.C., that a viable electrical steel business for Cleveland-Cliffs is the only way to resolve this very real national security issue,” said Goncalves. “We look forward to an expedited and positive conclusion of this Section 232 investigation self-initiated by the DOC.”

Cleveland-Cliffs posted a net loss of $49 million for the first quarter with total revenue of $359 million. Liquidity at the end of Q1 was approximately $1.25 billion.

Revenue from the steel and manufacturing segment includes AK Steel results from March 13 through March 31. During the period, flat rolled shipments totaled 199,000 tons at an average selling price of $997 per ton. Revenue was $217.5 million with cost of goods sold totaling $246.6 million. Sales volume was lower as a result of the COVID-19 pandemic.

The mining and pelletizing segment sales increased 38 percent to 2,134,000 long tons in the first quarter due to increased intercompany sales. Production was up 9.3 percent to 4,832,000 long tons. Revenue for the segment was $229.4 million compared to $157 million in the first quarter of 2019.

“Despite the challenge of the COVID-19 pandemic affecting lives and economic activity, we were able to successfully integrate AK Steel into the Cleveland-Cliffs way of doing business,” said Goncalves. “As we start the path to return to normal levels of business in the second half of the year, we are confident that we have the ample liquidity and all other means to remain comfortable through whatever uncertainty remains.”