Market Reaction: Cliffs’ Deal for FPT Could Shift Scrap Flows

In its announcement, Cliffs noted that prime scrap supply in the U.S. has been shrinking for the past 50 years due to improvements in yield and the offshoring of manufacturing. The U.S. currently imports 2 million gross tons of prime scrap annually. Demand for prime scrap and other metallics is poised to surge as the steel industry works to reduce carbon emissions and slow climate change. Cliffs estimates that metallics demand – including prime scrap, pig iron and HBI/DRI – will grow by more than 40% over the next four years to 29.6 million gross tons.

Cliffs’ acquisition of FPT will give it immediate control of approximately 15% of the merchant prime scrap market in the U.S. FPT currently processes around three million tons of scrap per year, half of which is prime grade. Industry trade publication Recycling Today lists FPT as the ninth largest overall ferrous scrap processing firm in North America.

FPT was a logical choice for Cliffs’ entry into the scrap market, for several reasons. Geographically, many of FPT’s 22 scrap collection and processing facilities are concentrated near Cliffs’ steelmaking sites in Indiana, Michigan, Ohio and Pennsylvania.

Cliffs’ mills use both basic oxygen furnaces (BOFs) and EAFs to melt steel. Prime scrap is a critical feedstock for both EAFs and BOFs. Access to FPT’s scrap allows Cliffs to optimize its material mix and lower the carbon intensity of all its steel production.

The company is also the largest supplier of flat-rolled steel to the auto industry in North America. The deal creates a platform for Cliffs to leverage its relationships with automotive OEMs into recycling partnerships in which the automakers could return prime scrap to FPT in a closed-loop arrangement.

“With all the new flat-rolled EAF capacity coming online in our market over the next four years, prime scrap will only become more and more scarce,” said Lourenco Goncalves, Cleveland-Cliffs’ Chairman, President and CEO. “The acquisition of FPT will enhance our ability to buy back prime scrap directly from our clients, cutting the middlemen and improving the margin contribution from scrap for both Cleveland-Cliffs and for the manufacturing and service center clients that will be able to sell scrap directly back to us.”

Market Reaction

Reports of the deal drew largely favorable reviews from the marketplace. As one observer commented: “Cleveland-Cliffs is a well-managed, progressive organization. It should bring discipline to FPT and to the scrap industry. This should make the overall industry better.”

FPT was the most logical acquisition target for Cliffs, commented one industry veteran to Steel Market Update. FPT has bought up most of the major dealers in the Cleveland and Detroit markets over the past 15 years and controls most of the busheling and #1 bundles in those districts.

“After ArcelorMittal bought the integrated mills in Cleveland and Chicago in the early 2000s, they stopped using prime scrap in their BOFs. This put many thousands of tons of prime scrap into the market to be sold to the expanding EAF mills. Now if Cliffs decides to use FPT’s prime scrap in its BOFs in Detroit, Riverdale, Chicago and Cleveland, it will definitely affect scrap sourcing by other mills such as North Star BlueScope and Nucor Indiana. Hence it could have a downstream effect in other districts as these mills may have to seek prime scrap elsewhere. It may also affect sourcing for a great many ductile and gray iron foundries, which FPT specializes in supplying,” he said.

Commented another scrap dealer in the Northeast: “Relative to Nucor and SDI, Cliffs is not currently a major scrap consumer. So I am not sure how much this will change scrap flows in the near term. Over the longer term, Cliffs may figure out how to use more scrap internally, but that’s going to take a few years.”

He added: “This acquisition gives Cliffs a scrap franchise to feed its own mills, but more importantly it gives them leverage in the scrap market over other consumers who want to buy the scrap. But remember, scrap supply contracts come and go. Other mills can try to buy other scrap companies with access to prime grades, or they can make deals with scrap generators to directly buy back tons, as Cliffs is planning to do.”

As one source pointed out, FPT gives Cliffs a natural hedge. “He [Goncalves] can treat FPT as a profit center. If he can figure out how to run the company – which is a much more entrepreneurial operation than Cliffs itself – he can decide when he wants to take positions, hold scrap for a little while, and dole it out where he wants to. So it’s potentially a net benefit to the scrap market as a whole.”

FPT reported pretax earnings of around $100 million last year. Goncalves’ offer of $775 million is nearly 8X EBITDA. “He overpaid for it,” said one observer.“But he probably doesn’t care because he’s playing the long game.”

By Tim Triplett, Tim@SteelMarketUpdate.com