Steel Mills

Cleveland-Cliffs Sees Opportunities in Auto

July 30, 2020

Cleveland-Cliffs is getting back to normal after idling 15 facilities in three months due to the impacts of COVID-19. As of today, all facilities, including the AK Steel Dearborn furnace, are back to operation with the exception of North Shore and Tilden, which will resume next week. Idling costs of around $50 million will be reflected in third-quarter results and be minimal in the fourth quarter, the company said.

The shutdown of the auto industry directly impacted AK Steel shipments as well as pellet deliveries for Cleveland-Cliffs. Flat-rolled steel shipments totaled 619,000 tons for revenue of $715.1 million. Mining and pelletizing sales volume of 4.8 million tons included 1.0 million tons of intercompany sales and resulted in revenue of $489 million. The company recorded a net loss of $108 million for the second quarter compared to net income of $161 million in Q2 2019. Revenue for Cleveland-Cliffs totaled $1.1 billion with total operating costs of $1.3 billion.

Cliffs’ Chairman, President, and CEO Lourenco Goncalves said: “The second quarter was an unusual one, with the full impact of the COVID-19 pandemic hitting our clients. Our main concern then was preserving our liquidity during a time we were not able to ship steel to our clients in all markets we serve, and particularly in our main end-market, the automotive industry. As of today, our clients are back to healthy levels of operation and our liquidity now sits solidly above the $1.1 billion mark. That happened way ahead of our conservative assumptions, creating a very exciting business prospect for a strong second semester.”

The auto shutdown was complete and without a lot of advance notice, said Goncalves. “The last time something similar happened to the auto industry was during World War II.”

Fleet sales, normally a price-driven demand driver for the auto market, are faltering with rental companies struggling to survive. “Fleets buy cars because they are cheap; people buy cars because they are reliable and fun to drive,” said Goncalves, adding that he is happy to see American automakers refocusing on vehicle quality, a criterion for the current consumer-driven market, rather than being “blindly price driven.”

“We finally have American companies innovating after having their lunch eaten,” said Goncalves. High-tech electric vehicles are entering the market by companies such as Tesla, Nickola and Rivian. Sales to auto companies are in great shape, he said, and Cliffs/AK Steel is adding new clients, including Tesla.

“The time of [automakers] imposing price decreases on steel mills is over,” said Goncalves. “The good news is that the wave of cars that are coming and the new wave of car builders who are starting to gain momentum in the U.S. have this technological mind set. That is exactly where we are.”

Goncalves said he was pleased by the smooth return of the Dearborn blast furnace. The idling of the hot strip mill at Dearborn has Middletown running at full nominal capacity, which it hasn’t done in a long time, he noted. Slabs from Dearborn are transported to Middletown via rail transport to be rolled and then returned to Dearborn for finishing, still saving costs for the company.

Goncalves said that EAFs have done a “fantastic job” in grabbing available market share due to their flexibility and low cost production. But EAFs cannot provide all the grades of steels that the auto industry requires. “We are getting to the last stretch where technology matters, R&D matters in order to produce steels that their process doesn’t allow,” said Goncalves. The technological research and development capabilities at AK Steel will allow Cleveland-Cliffs to be a leader in producing automotive steel, he said.

Cliffs’ new HBI plant will be completed in December and ramp-up is expected to be relatively quick, reaching near to its 1.9 million ton run rate next year. Pellet shipments in the third quarter are expected to be similar to slightly improved from the second quarter and then pick up in Q4 as mills stock up for winter. Cleveland-Cliffs has also secured a contract to supply DR grade pellets to Nucor’s plant in Trinidad.