Bigger Is Better, More Profitable for Cliffs: Goncalves

And in the meantime, prices might push higher still, Cliffs Chairman, President and CEO Lourenco Goncalves suggested on a conference call with industry analysts.

“We have been able to increase our prices. … We are cutting deals way above $1,500 per net ton,” he said of spot sales to service centers.

Part of the reason why that’s possible: “Right now, American consumers are consuming, and they’re consuming a lot,” Goncalves said.

Stimulus money provided by the federal government is being pumped back into the economy in the form of demand for consumer goods such as HVAC products, appliances and passenger vehicles. “That’s great for a flat-rolled steel producer like Cleveland-Cliffs,” he said. 

Bigger is Better

Cliffs swung to a profit of $41 million in the first quarter of 2021 from a loss of $52 million in the first quarter of last year. Revenue increased more than tenfold to $4.05 billion in the first quarter of this year from $359 million in the year-ago quarter.

And Cliffs expects to generate “record levels” of free cash flow for the remaining three quarters of this year, much of which will be used to pay down debt.

“I want to be debt free because, you know what, I don’t know when we are going to have another COVID. I don’t know what’s going to happen next,” Goncalves said.

The anticipated windfall comes in large part because of Cliffs’ acquisition of AK Steel and of ArcelorMittal USA. The latter deal closed in December 2020, meaning the first quarter of 2021 was Cliffs’ first with both assets under its belt.

Cliffs’ size has also given it more clout when it comes to contract negotiations. Automotive contract renewals completed at the beginning of April were done “with a nice price increase,” and future renewals were expected to see “significant improvements” as well, Goncalves said.

Automotive was a “make or break” business for AK Steel when it was a standalone company. And its primary competition was ArcelorMittal USA. “Now we own both. So the automotive clients … they are no longer negotiating with a beggar. They negotiate with the supplier that treats them with a lot of respect and demands respect” in return, Goncalves said.

Shortages of chips and other parts–rubber and foam are in short supply as well–have to date not meaningfully impacted Cliffs’ automotive business. “For the small amount of automotive tonnage that has been deferred, we have been able to divert that … to higher margin customers linked to the spot market,” he said.

Indeed, automotive demand in general has been so strong that Cliffs is restarting its Columbus Coatings galvanizing facility in Ohio. ArcelorMittal, its prior owner, announced it was idling the plant, which has coating capability of 450,000 tons per year, in June 2020 following the outbreak of the pandemic.

“We have been running our coating lines at full capacity,” Goncalves said. 

HBI Trumps Prime

If anyone in steel is hurting because of extended outages at automotive plants, it might be electric-arc furnace (EAF) steelmakers, which account for ~70% of U.S. steel output and which depend on prime scrap and virgin metallics to make advanced products such as flat-rolled steel, Goncalves said.

Prime scrap is a byproduct of automotive processes such as stamping. So high prices won’t bring more into the market as they would for obsolete grades, collection of which increases when prices do, he said.

And the “scarcity” of prime scrap will continue to drive flat-rolled steel prices higher, Goncalves predicted.

Cliffs should be insulated from the problem of expensive prime scrap because it is primarily an integrated steelmaker and because it is ramping up production at its hot-briquetted iron (HBI) plant in Toledo, Ohio.

The facility, which started up in December 2020, produced 120,000 tons in March and should reach its planned run rate of 1.9 million tons per year in the second quarter, Goncalves said.

Most of those tons will be consumed in Cliffs’ own furnaces, including its four EAFs. When Cliffs was only an iron ore miner and pellet producer–before its acquisition of AK and AM USA–it had intended to sell that material to third parties.

Times have changed. “I’m happy we did not sign long-term contracts,” Goncalves said. “I don’t have them now, and I don’t want long-term supply contracts going forward.”

In a nod to Earth Day, Goncalves also touted the green credentials of the U.S. steel industry, which he said accounts for 2% of global steel-related greenhouse gas emissions compared to the 64% that stem from Chinese steelmakers.

The United States’ green edge comes thanks to its heavy tilt toward EAF production and because domestic blast furnace producers rely on pellets as feedstock instead of more polluting sinter feed.

And on the green front, it should not be assumed that EAF mills are more environmentally friendly than integrated ones, especially if those EAFs are charging imported pig iron, which is associated with high carbon emissions, Goncalves said.

If such factors are taken into account, Cliffs’ Middletown, Ohio, blast furnace is comparable to an EAF in terms of carbon emissions, he claimed. 

Settling Old Scores

Finally, Goncalves turned his guns on two favorite targets: industry analysts and speculative buyers.

“The so-called experts that have long predicted the demise of the domestic steel industry have been proven completely wrong,” he said. “Their addiction to negativity is apparently the only thing that they care about. These folks just don’t want to see our industry thrive.”

And he chided certain service centers for not loading up on tons when prices were low, a time when they could have filled their warehouses  “through the roof”–and then complaining more recently about not being able to find steel with prices high.

SMU’s average hot-rolled coil price fell to a 2020 low of $440 per ton in August before skyrocketing higher late last year and into 2021.

“They were waiting for another $10, $20, $30 bucks to drop to then be ‘opportunistic’,” he said. “We don’t need all of these ‘opportunistic’ players in the marketplace. They just destroy, complicate, gossip, talk on the phone, send fake information.”

By Michael Cowden, Michael@SteelMarketUpdate.com