Cliffs Enters Scrap in a Big Way with $775M Deal for FPT

FPT recorded earnings before interest, taxes, depreciation and amortization (EBITDA) of roughly $100 million in the 12 months ended Aug. 31, 2021, Cliffs said in a press release on Monday, Oct. 11.

Detroit-based FPT processes approximately three million tons of scrap a year, roughly half of which is prime scrap. That makes it one of the largest prime scrap distributors in the U.S., where it accounts for approximately 15% of the domestic merchant market for prime, Cliffs said.

“Cleveland-Cliffs is entering the scrap business as a major player through the acquisition of a large scrap company,” Goncalves said.

“Even more importantly, FPT has a very meaningful presence in prime scrap. With all the new flat-rolled EAF (electric arc furnace) capacity coming online in our market over the next four years, prime scrap will only become more and more scarce,” he said.

The deal for FPT is expected to close in the current quarter pending regulatory approvals and customary closing conditions, Cliffs said.

The acquisition means Cliffs will add scrap to its growing menu of raw materials. The company also operates a direct-reduced iron (DRI) plant in Toledo, Ohio, as well as coal mines, coke plants, iron ore mines, and iron ore pelletizing operations.

Recall that Cliffs was primarily a supplier of raw material to steelmakers before its blockbuster acquisitions in 2020 of the former AK Steel and the former ArcelorMittal USA. Those transactions transformed the company from primarily an iron ore miner to the largest flat-rolled steelmaker in the U.S.

The Logic

FPT operates 22 scrap processing facilities, and about 90% of its revenues come from the Midwest – and from operations in Michigan and Ohio in particular, Cliffs said.

Outside of the Midwest, the company has two locations in two Florida, two in Tennessee, and one each in Windsor, Ontario, and Aquascalientes, Mexico, according to an investor presentation.

And FPT also sports an “outsized” position in the automotive and industrial scrap markets, areas that Cliffs thinks are ripe for continued growth.

Cliffs intends to create “recycling partnerships” – an apparent reference to closed-loop recycling programs – with its automotive customers. The company thinks it should be able to leverage its position as the United States’ largest flat-rolled steelmaker and its position as a key supplier to the automotive market to do so.

And Cliffs will use the scrap it controls not only to feed its own furnces but also for third-party sales, per the presentation. 

There are only two integrated steelmakers left in the U.S. supplying automotive – Cliffs and Pittsburgh-based U.S. Steel.

Prime scrap is a key input for EAF sheet mills, and much of that prime scrap comes from processes associated with making cars or car parts – think stampers, for example.

There has been speculation that Cliffs might acquire EAF operations. Cliffs on Monday said it had “no current plans to add additional steelmaking capacity.”

While Cliffs is known primarily as an integrated steelmaker, it also operates EAFs at its stainless mill in Mansfield, Ohio; its stainless and carbon steel mill in Butler, Pa.; its plate mill in Coatesville, Pa.; and its rail mill in Steelton, Pa.

Flat-rolled EAFs are typically fed with a mix that contains 60-70% prime scrap and metallics, the investor presentation noted.

And it’s not just EAFs that need prime scrap. While liquid iron is the primary source of Fe at integrated mills, basic oxygen furnaces (BOFs) also use prime scrap.

The Squeeze

Demand for prime scrap is expected to increase sharply as new EAF capacity is added. That trend is colliding with expectations of limited or no growth when it comes to prime scrap supplies, Cliffs said.

Prime scrap supplies have been shrinking for the last 50 years, and the U.S. now imports approximately two million gross tons of scrap annually to meet its requirements, the company said in the presentation.

The problem: Prime scrap is largely inelastic to price. Automakers will not stamp parts they don’t need because prices are high. Obsolete grades – think shredded scrap and heavy melting scrap (HMS) – typically see increased supplies when prices are higher because more scrap will be collected, more cars will be shredded and more buildings demolished.

Approximately 14 million tons of new flat rolled EAF capacity will be added to the U.S. over the next three years at a cost of roughly $11 billion dollars, according to SMU’s new flat-rolled steel capacity table.

And EAF growth outside of North America is occurring at an even faster clip. The additional tons here represent a “tiny portion” of the roughly 110 million tons of EAF capacity being added globally – meaning that sourcing prime scrap will become a worldwide challenge, CRU Senior Analyst Ryan McKinley has said.

In other words, demand is going up, and supply is not – which means that prime scrap prices will probably move higher over the long term.

A Deal Foreshadowed

Goncalves has made no secret of his desire to make a big foray into prime scrap.

He said at SMU’s Steel Summit conference in August that Cliffs would expand into scrap “very soon” because scrap had become a “precious metal.”

“I want my piece of that,” he said at the event.

He also announced that Cliffs would form a new scrap division with the promotion of former CFO Keith Koci to president of Cleveland-Cliffs Service, the official name of the new scrap, logistics and raw materials wing of the company.

The History

Cliffs’ deal for FPT is not without precedent. Three major flat-rolled steelmakers now have access to significant reserves of in-house scrap.

The David J. Joseph Co. (DJJ), one of the largest scrap processors and brokers in the U.S., was acquired by Charlotte, N.C.-based Nucor for $1.44 billion in March 2008. That move came after Steel Dynamics Inc. (SDI) bought OmniSource Corp., a major Midwest scrap processor, in 2007 for slightly more than $1 billion.

With Cliffs’ deal for FPT, it now appears that going big in scrap is a prerequisite to going big in U.S. steel.

By Michael Cowden, Michael@SteelMarketUpdate.com