Cliffs-US Steel combo’s pricing power could roil auto steel market: sources

Even so, its ability to bolster prices will face competitive pressure from lower-priced imports and potential curtailment of demand from automakers that may choose to substitute steel for other materials in some of the parts that make up vehicles, according to market participants.

“The consolidation of supply will give Cliffs leverage with its customers,” an auto parts maker said. This may not mean higher prices in the current market but “it could mean steel prices won’t fall”, the source added.

The two integrated steel companies, if combined, would dominate automotive steel with a share that “would be well over 50% of the market,” Phil Gibbs, Michael Leshock, and Samuel McKinney said in an analyst note last week from KeyBanc Capital Markets.

Other market participants have estimated the combination of Cliffs and US Steel may represent as much as 80% of the market for automotive steel.

“I think the auto guys will march to DC saying that there needs to be some competition in the auto supply space,” a mill source said.

“Between Cliffs and USS, I don’t see this happening without a potential breakup of USS and Big River Steel. Too many monopolistic factors [and] I have a feeling the regulatory hurdles are going to be a lot more complex and time-consuming than [Cliffs expects],” the mill source said.

Not everyone considers the deal’s prospects as slim to none. Some market participants say they expect that ultimately Lourenco Goncalves, Cleveland-Cliffs’ chairman, president and chief executive officer, will succeed at least in part in his quest.

“They are in play. Something’s going to happen,” the auto parts maker said.

“Lourenco is pretty smart. He’s positioned himself pretty well, he’ll end up with something,” a trader said.

A Midwest distributor, despite expecting Washington to say no to the combination, said Goncalves’ strong support of “the green new deal,” a key initiative of the Biden Administration, could open the door to “clearing antitrust” issues.

In the end, the combination will likely bring stability to a volatile steel market, according to a southern distributor.

“While it’s definitely a [pricing power] threat, it could also be good. Automotive is typically going to be in a better position. They are the base tons for a lot of steel mills,” the southern distributor said.

Market dynamics

If the deal is approved, the concentration in the US automotive steel market will shift competitive supply pressures away from domestic materials to imports.

“Imports can act as competition if Cliffs stubbornly holds prices higher,” the southern distributor said. “You can buy imports at prices well below domestic.”

Goncalves highlighted the global nature of automotive steel competition from US transplants of foreign automakers in an interview with CNBC last week.

“We compete against steel coming from South Korea. We compete against steel coming from Japan. The transplants from Japan like their steel from Japan. The transplants from Korea like their steel from Korea. Same thing with the Germans,” Goncalves said.

“Even companies that are members of the Detroit Three [have been] importing [steel] — and one of them has been importing from Europe. So the fight is in a much bigger geography and in that regard, we are very small [on a global basis], even after the merger,” he added.

The acquisition would make Cliffs the 10th largest steelmaker in the world and the only American company in the top ranks.

Goncalves also noted that steel is competing against other materials that are used to make cars.

Steel currently makes up about 54% of the content of US domestically-produced automobiles, according to the American Iron and Steel Institute, and competes against other materials – such as aluminum, plastic and composites – that can potentially be substitutes for steel in automotive parts.

That threat, however, does not appear to be imminent, according to the Midwest distributor.

“There is an argument that plastic covered steel from Nucor and SDI could potentially replace the steel provided by Cliffs and US Steel, but for now, the continuous cast [electric-arc furnace] mills lack the quality for exterior automotive parts, the bumpers, the hoods, the exposed parts,” the Midwest distributor said.

For the foreseeable future, US automakers appear likely to prefer steel from the integrated steelmakers because it is better suited to their needs, according to the auto parts maker.

For example, steel from integrated mills is valued for its ductility, the ability to be hammered thin or stretched into wire without breaking, the auto parts maker said.

Integrated steelmakers also provide automakers with sheet that has strong formability, meaning it can maintain its structural integrity while being plastically deformed into various shapes at auto stamping plants.

Even so, technology is evolving and a potentially single dominant US integrated steelmaker “will have to face at what point electric-arc furnaces becomes an effective alternative,” the auto parts supplier said.

Rijuta Dey Bera and Zachary Miller in New York contributed to this article.