Cleveland-Cliffs to Acquire AK Steel

CLEVELAND & WEST CHESTER, Ohio–(BUSINESS WIRE)– Cleveland-Cliffs Inc. (NYSE: CLF) and AK Steel Holding Corporation (NYSE: AKS) are pleased to announce that they have entered into a definitive merger agreement pursuant to which Cliffs will acquire all of the issued and outstanding shares of AK Steel common stock. Lourenco Goncalves, Chairman of the Board, President and CEO of Cliffs, will lead the expanded organization.

Under the terms of the merger agreement, AK Steel shareholders will receive 0.40 shares of Cliffs common stock for each outstanding share of AK Steel common stock they own. Upon completion of the transaction, Cliffs shareholders will own approximately 68% and AK Steel shareholders will own approximately 32% of the combined company, respectively, on a fully diluted basis.

The fixed exchange ratio implies a consideration of $3.36 per share of AK Steel common stock and represents a premium of 16% based on the closing share prices of Cliffs and AK Steel common shares, respectively, as of December 2, 2019, and a premium of 27% based on the 30-day volume weighted average price of AK Steel common shares. The transaction implies an aggregate consideration to AK Steel shareholders of approximately $1.1 billion on a fully diluted basis, a total enterprise value of approximately $3.0 billion for AK Steel and an acquisition multiple of 5.6x LTM Adjusted EBITDA.

The transaction will combine Cliffs, North America’s largest producer of iron ore pellets, with AK Steel, a leading producer of innovative flat-rolled carbon, stainless and electrical steel products, to create a vertically integrated producer of value-added iron ore and steel products. The combined company will be ideally positioned to provide high-value iron ore and steel solutions to customers primarily across North America.

Mr. Goncalves stated: “We are excited to be able to deliver real value to the shareholders of both Cliffs and AK Steel through a value enhancing and leverage-neutral transaction. By combining the best-in-class quality of AK Steel’s assets and its enviable product mix with Cliffs’ debt profile and proven management team, we are creating a premier North American company, self-sufficient in iron ore pellets and geared toward high value-added steel products.”

He continued, “The pro forma Cliffs will be a vertically integrated steel company that is expected to drive improved profitability for existing Cliffs and AK Steel shareholders and is well-positioned to serve both the blast furnace and electric arc furnace segments. In addition, Cliffs’ existing strong balance sheet and self-sufficiency in pellets for the combined company provide flexibility to pursue additional growth opportunities, including the potential future utilization of the blast furnace in Ashland to produce merchant pig iron, an opportunity neither company could pursue on a standalone basis.”

Mr. Goncalves concluded, “For Cliffs, we expect to realize immediate growth and a long-desired objective of a more diverse customer base, as well as more predictable cash flow generation due to the contracted nature of AK Steel’s sales of high-end automotive steel. Our track record of providing high-grade iron ore combined with AK Steel’s recognized ability to produce the highest quality steel grades, creates a highly complementary and compelling business model. We look forward to welcoming the AK Steel team into our organization and creating a unique company focused on executing value-enhancing opportunities for all of our stakeholders.”

Roger K. Newport, CEO of AK Steel, added, “We believe this transaction is a compelling opportunity for AK Steel shareholders to participate in the substantial upside potential of what will be a premier vertically integrated producer of value-added iron ore and steel products with significant scale and diversification. Our shareholders will benefit from exposure to a larger, more diversified company that is better positioned to capitalize on growth opportunities. The combination of Cliffs’ iron ore pellet capabilities and our innovative, high-quality steel product development and production is strategically compelling. Together, we expect to be able to take advantage of growth opportunities faster and more fully than either company could on its own. With AK Steel’s 120-year heritage, which began in Ohio, and expertise in steelmaking, AK Steel and Cliffs make an excellent combination, which we expect will facilitate a smooth integration process.”

Key Strategic & Financial Benefits

  • Brings together complementary businesses to create company with full suite of value-added products: The combination will create significant opportunities to generate additional value from market trends across the entire steel value chain and enable more consistent, predictable performance through market cycles. The integrated supply chain provides AK Steel self-sufficiency in iron ore supply. Together, Cliffs and AK Steel will have a presence across the entire manufacturing process, from mining to pelletizing to the development and production of finished high value steel products, including Next Generation Advanced High Strength Steels for automotive and other markets.
  • Solidifies demand for Cliffs’ pellet offtake, with potential for growth into merchant pig iron: The combined company will ensure pellet volume commitments to AK Steel’s blast furnaces along with Cliffs’ Toledo hot briquetted iron facility, to complement its existing long-term minimum volume pellet offtake agreements with other key integrated steel producers. Further, the potential startup of pig iron manufacturing at AK Steel’s facility in Ashland, Kentucky would create future opportunities for pellet demand and more metallics products without significant additional capital expenditures.
  • Accretion through significant annual synergies: The transaction offers significant potential for operational synergies, which will contribute to long-term value creation for investors. The combination is expected to generate approximately $120 million of annual cost synergies to be fully realized within the first 12 months after closing, primarily from consolidating corporate functions, reducing duplicative overhead costs, and procurement and energy cost savings, as well as operational and supply chain efficiencies.
  • Stronger company with compelling pro forma financial metrics: The combined company is expected to benefit from a larger and more diversified base of customers, with less overall emphasis on commodity-linked contracts. For the last twelve months, the pro forma combined company has generated net revenue of $8.2 billion1, Adjusted EBITDA of $1.3 billion2 and unlevered free cash flow of $923 million2,3. The transaction will also be leverage-neutral with pro forma Total Debt to Adjusted EBITDA of 3.5x.

Additional Transaction Details & Governance

Following completion of the transaction, with Mr. Goncalves leading the expanded organization, Mr. Newport will retire as CEO and a Director of AK Steel. Three existing members of AK Steel’s Board of Directors will join the Cliffs Board, and two existing Cliffs Board members will step down, bringing the Cliffs Board to 12 members in total. AK Steel will become a direct, wholly-owned subsidiary of Cliffs and will retain its branding and corporate identity. Cliffs will continue to be listed on the NYSE with its headquarters in Cleveland, while maintaining a significant presence at AK Steel’s current offices in West Chester, Ohio along with its Research and Innovation Center in Middletown, Ohio.

The transaction is expected to close in the first half of 2020, subject to approval by the shareholders of both companies, receipt of regulatory approvals and satisfaction of other customary closing conditions.

Cliffs has obtained an approximately $2 billion financing commitment from Credit Suisse in connection with a new Asset Backed Loan and the refinancing of AK Steel’s 2023 senior secured notes.

Advisors and Counsel

Moelis & Company LLC and Credit Suisse are acting as financial advisors to Cliffs and Jones Day is serving as legal counsel. Goldman Sachs & Co. LLC is acting as financial advisor to AK Steel and Weil, Gotshal & Manges LLP is serving as legal counsel.

Board of Directors’ Recommendation

The transaction has been unanimously approved by both companies’ Boards, and both Boards recommend that their respective shareholders vote in favor of the transaction.

Joint Conference Call & Webcast Information

Cleveland-Cliffs and AK Steel will conduct a live conference call and webcast on December 3, 2019 at 8:30 a.m. Eastern Time. The call will be broadcast live and archived on Cliffs’ website at www.clevelandcliffs.com and on AK Steel’s website at www.aksteel.com. Presentation slides will also be available on the webcast link and on both companies’ Investor Relations pages on their websites, as well as through the joint transaction website at www.clevelandcliffsaksteel.acquisitionannouncement.com.

About Cleveland-Cliffs

Founded in 1847, Cleveland-Cliffs is the largest and oldest independent iron ore mining company in the United States. The company is a major supplier of iron ore pellets to the North American steel industry from its mines and pellet plants located in Michigan and Minnesota. By 2020, Cleveland-Cliffs expects to be the sole producer of hot briquetted iron (HBI) in the Great Lakes region with the development of its first production plant in Toledo, Ohio. Driven by the core values of safety, social, environmental and capital stewardship, Cleveland-Cliffs’ employees endeavor to provide all stakeholders with operating and financial transparency. For more information, visit http://www.clevelandcliffs.com.

About AK Steel

AK Steel is a leading producer of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing, including electrical power, and distributors and converters markets. Through its subsidiaries, the company also provides customer solutions with carbon and stainless steel tubing products, hot- and cold-stamped components, and die design and tooling. Headquartered in West Chester, Ohio (Greater Cincinnati), the company has approximately 9,500 employees at manufacturing operations in the United States, Canada and Mexico, and facilities in Western Europe. Additional information about AK Steel is available at www.aksteel.com.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This communication contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In this context, forward-looking statements often address expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “would,” “target” and similar expressions, as well as variations or negatives of these words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about the consummation of the proposed transaction and the anticipated benefits thereof. These and other forward-looking statements reflect AKS’s and CLF’s current beliefs and judgments and are not guarantees of future results or outcomes. Forward-looking statements are based on assumptions and estimates that are inherently affected by economic, competitive, regulatory, and operational risks and uncertainties and contingencies that may be beyond AKS’s or CLF’s control. They are also subject to inherent risks and uncertainties that could cause actual results or performance to differ materially from those expressed in any forward-looking statements. Important risk factors that may cause such a difference include (i) the completion of the proposed transaction on the anticipated terms and timing or at all, including obtaining shareholder and regulatory approvals and anticipated tax treatment, (ii) potential unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, economic performance, indebtedness, financial condition, losses and future prospects, (iii) the ability of CLF to integrate its and AKS’s businesses successfully and to achieve anticipated synergies, (iv) business and management strategies for the management, expansion and growth of the combined company’s operations following the consummation of the proposed transaction, (v) potential litigation relating to the proposed transaction that could be instituted against AKS, CLF or their respective directors, (vi) the risk that disruptions from the proposed transaction will harm AKS’ or CLF’s business, including current plans and operations, (vii) the ability of AKS or CLF to retain and hire key personnel, (viii) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the proposed transaction, (ix) uncertainty as to the long-term value of CLF’s common stock, (x) continued availability of capital and financing and rating agency actions, (xi) legislative, regulatory and economic developments and (xii) unpredictability and severity of catastrophic events, including acts of terrorism or outbreak of war or hostilities, as well as management’s response to any of the aforementioned factors. These risks, as well as other risks associated with the proposed transaction, will be more fully discussed in the joint proxy statement/prospectus that will be included in the registration statement on Form S-4 that will be filed with the SEC in connection with the proposed transaction. While the list of factors presented here is, and the list of factors to be presented in the registration statement on Form S-4 are, considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Other factors that may present significant additional obstacles to the realization of forward looking statements or which could have a material adverse effect on AKS’ or CLF’s respective consolidated financial condition, results of operations, credit rating or liquidity are contained in AKS’s and CLF’s respective periodic reports filed with the SEC, including the AKS 10-K and CLF 10-K. Neither AKS nor CLF assumes any obligation to publicly provide revisions or updates to any forward looking statements, whether as a result of new information, future developments or otherwise, should circumstances change, except as otherwise required by applicable law.

IMPORTANT INFORMATION ABOUT THE TRANSACTION AND WHERE TO FIND IT

In connection with the proposed transaction involving AK Steel Holding Corporation (“AKS”) and Cleveland-Cliffs Inc. (“CLF”), CLF will file with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4 that will include a joint proxy statement of AKS and CLF, which also constitutes a prospectus of CLF. AKS and CLF may also file other documents with the SEC regarding the proposed transaction. This document is not a substitute for the joint proxy statement/prospectus or registration statement or any other document that AKS or CLF may file with the SEC. The definitive joint proxy statement/prospectus will be sent to the shareholders of AKS and the shareholders of CLF. INVESTORS AND SECURITYHOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT, THE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS THAT ARE FILED OR WILL BE FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THESE DOCUMENTS, CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION AND RELATED MATTERS. Investors and securityholders may obtain free copies of the registration statement and the joint proxy statement/prospectus (when available) and other documents filed with the SEC by AKS or CLF through the web site maintained by the SEC at www.sec.gov. Documents filed with the SEC by AKS will also be available free of charge on the AKS website at www.aksteel.com or by contacting AKS’s investor relations department. Documents filed with the SEC by CLF will also be available free of charge on CLF’s website at clevelandcliffs.com or by contacting CLF’s investor relations department:

AK Steel

               

Cleveland-Cliffs

513-425-5215

               

216-694-5700

PARTICIPANTS IN THE SOLICITATION

AKS, CLF and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. Information regarding AKS’ directors and executive officers, including a description of their direct interests, by security holdings or otherwise, is set forth in AKS’ Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 15, 2019 (the “AKS 10-K”), and its proxy statement filed with the SEC on April 10, 2019. Information regarding CLF’s directors and executive officers, including a description of their direct interests, by security holdings or otherwise, is set forth in CLF’s Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 8, 2019 (the “CLF 10-K”), and its proxy statement filed with the SEC on March 12, 2019. Additional information regarding the interests of these participants and other persons who may be deemed participants in the proposed transaction may be obtained by reading the joint proxy statement/prospectus and other relevant materials to be filed with the SEC when such materials become available. Free copies of these documents may be obtained from the sources indicated above.

NO OFFER OR SOLICITATION

This communication is not intended to and shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote of approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

______________________
1 Pro forma LTM numbers exclude intercompany sales, which are calculated based on 25% of revenue, per Cleveland-Cliffs and AK Steel’s 2018 10-Ks.
2 Pro forma numbers include $120 million in anticipated synergies and utilizes each companies’ respective methodologies of calculating Adj. EBITDA.
3 Defined as Adj. EBITDA – Capex. Excludes HBI-related 9/30/2019 LTM capex of $415m, per Cliffs’ filings.

 

Source: Cleveland-Cliffs Inc.

European Stainless Steel Prices Lose Link To Raw Material Costs

European stainless steel prices continue to fall, relative to the costs of the constituent raw materials. The “basis plus alloy surcharge” pricing system has been abandoned for most deals between the producers and the major buyers, such as large distributors and stockists. Nevertheless, the mills continue to publish their alloy surcharges. Therefore, it is possible to calculate a nominal basis price, by subtracting the alloy extra from the “effective price.”

On several occasions, this year, transaction values have risen by less than the increase in the published alloy surcharges, or fallen by more than the decrease in the mills’ announced figures. In either case, the nominal basis price is reduced.

The numbers produced, in recent months, have fallen far below the figures historically thought to represent the producers’ breakeven levels.

The root of this problem lies in the discrepancy between the cost of raw materials – in particular, nickel – and the demand for finished stainless steel. Traditionally, stainless steel production has been the overwhelmingly largest consumer of nickel. Consequently, demand for the alloy has been the major fundamental factor in nickel pricing. In recent times, though, the commodity value of nickel has been affected by anticipated future requirements for the metal, by manufacturers of electric vehicle batteries. This has been compounded by supply constraints, such as the nickel ore export restrictions imposed by the governments of Indonesia and, previously, the Philippines. Consequently, the nickel price increased, this year, in a manner seemingly out of line with activity in the stainless steel industry.

In mitigation, due to their modest production volumes, the European mills have been able to achieve discounts in their outlay for stainless steel scrap. Recent reports suggest that they have been paying less than 60 percent of the intrinsic LME price for the nickel contained in the scrap. Assuming a 60 percent scrap mix in their steelmaking process, this could have recently saved around €300 per tonne of crude stainless steel produced, compared with the cost of paying the full LME nickel price.

Source: MEPS International Ltd.MEPS Stainless Steel Review

Demand Growth Required to Sustain Rise in US Steel Prices

US steel prices, for flat products, have been under negative pressure, for much of this year. In an attempt to halt further price deterioration, domestic producers announced consecutive list price hikes, totalling US$80 per short ton, in recent weeks. This has been the catalyst for an uptick in purchasing activity. Extended delivery lead times, due to planned mill outages, and a continued shortage of import alternatives, have had a stabilising effect, while creating a pricing floor in the market.

This will offer some welcome respite to US steelmakers. US steel prices are expected to move up, either side of the New Year. Inventory replenishment and a continued revival in scrap costs should exert upward pressure on steel selling values. However, MEPS predicts that it is unlikely that this will lead to a prolonged recovery. US steel prices are forecast to peak in the spring. It is widely acknowledged that the US steel sector remains fundamentally oversupplied, given the current level of activity.

Domestic capacity utilisation, in the US, remains slightly above 80 percent, year to date. The World Steel Association predicts that growth, in US steel demand, will be just 0.4 percent, in 2020 – following on from an anticipated 1 percent expansion, this year. With little demand improvement projected, any pricing revival, in the near future, is likely to prove to be a false dawn for US steel manufacturers.

Source: MEPS International Ltd.MEPS International Steel Review

Weak Demand Prompts Further Capacity Cuts As Producers Seek To Recover Costs

Excess production capacity persists within the Nordic and Western European flat steel products markets. Idling of blast furnaces and ArcelorMittal’s withdrawal from its takeover of the Ilva facility may go some way to addressing this issue. Monthly contract or spot prices continued to fall during November. However, supply chain participants believe that the bottom of the current price cycle is close.

Hot rolled coil sales volumes are fair, in Denmark, but end-users, in the wider region, report falling order tonnages. Inventories, within the supply chain, are high, in Sweden and Norway. Local demand is mediocre, in Finland and the Netherlands. Austrian selling figures are on a downward trend, affected by poor sales and recent drops in scrap costs.

Transaction values for hot rolled plate, in Denmark and Finland, fell again, in November. Subdued end-user demand is exacerbated by buyers’ caution, due to future price trend uncertainty. Swedish consumption remains disappointing. Shipbuilding activity is satisfactory, in the Netherlands, but demand from agricultural equipment manufacturers is poor. The Austrian market remains muted. In Norway, demand from the offshore oil and gas sector is strong but a slowdown is foreseen, in 2020.

Producers of cold rolled coil are expected to seek price increases soon, although they may not achieve these until February or March 2020. Danish prices slipped again, in November. In Sweden, sales of commercial grades are satisfactory. Consumption is moderate, but reducing, in Finland. Distributors, in the Netherlands, are minimising their stock levels ahead of the calendar year-end. Austrian suppliers report a lack of orders for first quarter 2020 delivery. In Norway, delivery lead times, from regional mills, are very short.

Depressed activity in the auto supply chain continues to inhibit demand for coated sheet and coil in Sweden, Denmark and the Netherlands. In Finland, offers from Russian suppliers are very aggressive but delivery promises are known to be unreliable. In Austria, sales to building-related applications are healthy. Lacklustre consumption contributed to a small price cut, in Norway.

Drawing quality wire rod sales volumes remain reasonable, in Sweden. A “year-end effect” is being experienced in Finland, as customers consume their inventories rather than placing new orders. Transaction values were unchanged, in local currency terms, in all the other countries surveyed, in November.

Regional mills report satisfactory order loads for medium sections and beams, although it remains possible to book some December rollings. Stiff competition, amongst supply chain participants, continues to push beam prices downward, in Sweden and Denmark. Construction activity is cooling, in Finland and the Netherlands, but remains quite busy, in Austria. Demand is fair, in Norway.

The seasonal slowdown in the reinforcing bar sector has begun but Scandinavian demand remains better than that in the rest of Europe. Reasonable consumption continues, in Finland, with projects in wind power, mining and the manufacturing sector. Producers may seek increased prices soon, in the Netherlands, following the recent rebound in scrap costs. Selling values softened, this month, in Austria, due to low raw material outlay and weak demand. Activity is fair, in Norway,

Domestic demand for merchant bars is steady, at a low level, in Denmark. In Sweden, sales to automotive and other manufacturers are weak. Local purchase volumes are fair, in Finland, but exports to Germany have decreased. In the Netherlands, regional mills are beginning to propose price increases. Weak demand and depressed raw material costs prevail, in Austria. Manufacturing activity is subdued, in Norway.

Source: MEPS International Ltd.MEPS European Steel Review Supplement

European Steel Prices Approaching Bottom of The Current Cycle

Procurement activity, resale values and sentiment remain weak, in the European strip mill products market, in November. Slow economic growth, global trade conflicts and political difficulties have added to the air of pessimism. A lack of orders, from the auto sector, in particular, continues to have a significant negative effect on overall demand. European steel prices are under downward pressure. Domestic delivery lead times are short, allowing customers either to postpone buying decisions, or to purchase only small quantities.

On a brighter note, price offers from third country suppliers began to rise. For the moment, Ilva is not accepting new orders, because of the withdrawal of ArcelorMittal from the deal with the Italian government to take over the company. If this situation persists, it should help to tighten supply throughout Europe, adding to the capacity cuts already in place at other steelmakers. Moreover, a number of buyers believe that prices are reaching the bottom for this cycle. Consequently, a degree of inventory replenishment may get underway, following a prolonged destocking phase.

German Strip Mill Market is Quiet

The German market for strip mill products is quiet. Business levels are low. Basis prices continue to fall. Steelmakers are lacking orders due to the significantly reduced activity in the auto industry. Machinery manufacture is also under pressure. Producers continue to offer discounts in order to try to generate sales and compete against imports. Service centre inventories are gradually declining but remain in excess, compared with today’s low demand.

In France, customers can obtain good discounts

End-user activity has, generally, remained quite good, in France, with the exception of the slowdown now taking place in the auto sector. Demand from the rest of industry is reasonable. However, customers are aware that they can obtain good discounts, with quick deliveries. Prices continued to decrease, in November, but some stabilisation is now noted. Despite production cuts, several steelmakers are still struggling to fill their order books. Competitive offers from overseas suppliers remain plentiful.

Italian Strip Mills attempting to lift Steel Prices

In Italy, mills are attempting to lift strip mill product prices, citing the recent ownership problem at Ilva, which is expected to lead to much tighter supply. For the moment, availability is ample. Demand remains very weak, with producers still prepared to lower their offers in order to secure orders. Delivery lead times remain relatively short. Pressure from third country imports eased recently. Indian suppliers are less active. Turkish quotations increased in price, albeit only slightly, due to a pickup in activity in their home market. Distributors report further negative pressure on their resale values.

UK Steel Prices Moving Down 

In the UK, many service centres report a lack of demand. Those supplying the auto sector are most badly hit. Credit insurers are wary due to the recent insolvencies at several large distributors. Consequently, credit limits have tightened. However, a number of stockholders report good business in September/October, in terms of volumes and margins. Nevertheless, mill prices are moving down, quite rapidly, for deliveries in January 2020. Imports are particularly attractive, since the pound sterling strengthened. Material is available from India, Brazil, South Korea and Turkey. Inventories are still being run down.

Belgian Steel Demand Remains Weak

In Belgium, steel demand remains weak. Stock levels are high. End-users only buy for their short-term needs. Steelmakers are chasing orders and cutting output. Negative price pressure persists. Market sentiment needs to improve before any revival takes place. Large service centres are also keen to make sales, in order to improve turnover and reduce inventories before the year-end. Intense competition in the distribution sector led to further discounting.

Negative Trend Persists in Spain

After October’s rapid deterioration in strip mill product prices, the negative trend persisted into November, in Spain. Customers continue to purchase only for their immediate needs, even though many buyers believe selling values have now reached the bottom for this cycle. Service centres report that sales volumes in the general market are acceptable. Construction demand is stable. Demand from the auto sector is likely to continue to fall in 2020, although the drop will be far less dramatic than in recent times. At the service centres, resale margins remain very low.

Source: MEPS International Ltd.MEPS European Steel Review

Tata Steel outlines proposals to build a stronger and more sustainable business in Europe

Tata Steel today (Monday, 18 November) outlined proposals for a transformation programme in Europe. The programme is needed to ensure the business can thrive despite severe market headwinds which have led to a sharp decline in profitability. At the same time, it aims to secure the foundation for investments required to accelerate innovation and the company’s journey towards carbon-neutral steelmaking.

Tata Steel highlighted plans to urgently improve its financial performance to make sure the European business becomes self-sustaining and cash positive, while enabling investment to safeguard its long-term future. The plans include a proposed new way of working to boost productivity and reduce bureaucracy as well as a focus on increasing sales of higher-value steel products and solutions.

Henrik Adam, CEO of Tata Steel in Europe, said: “Today we are highlighting important proposals towards building a financially strong and sustainable European business. We plan to change how we work together to enable better cooperation and faster decision-making. This will help us become self-sustaining and cash positive in the face of unprecedented severe market conditions, enabling us to lead the way towards a carbon-neutral future.”

The programme is focused on four areas to improve financial performance:

  • Increasing sales of higher-value steels by improving product mix and customer focus;
  • Efficiency gains by optimising production processes, supported by the application of big data and advanced analytics;
  • Lowering employment costs, leading to an estimated reduction in employee numbers of up to 3,000 across Tata Steel Europe’s operations, about two-thirds of which are expected to be office-based (‘white collar’) roles;
  • Reduction of procurement costs through smarter sourcing and strengthening cooperation with companies within the Tata Steel group.

Through its proposed transformation programme, Tata Steel Europe is initially targeting a positive cash flow by the end of its financial year ending March 2021. It is also aiming for an EBITDA margin of around 10% throughout the market cycle. Based on full year 2019 revenue figures, this would equate to £750 million in EBITDA. With improved earnings and cash flows, Tata Steel Europe will be a financially self-sustaining business able to invest in asset reliability and improvements while also servicing its financial obligations to its lenders and shareholders.

A transformation is needed to mitigate the current structural and cyclical headwinds and create the foundation for the company’s future success. Stagnant EU steel demand and global overcapacity have been compounded by trade conflicts which have turned the European market into a dumping ground for the world’s excess steel capacity. Together with a significant increase in the cost of emission allowances, this has created an urgent need for improvements to the company’s financial performance.

In the first six months of its current financial year (starting April 2019), Tata Steel Europe reported a drop of 90% in EBITDA to £31 million. Revenue was £3.25 billion.

Tata Steel Europe will engage with various stakeholders to develop the proposed decisions and ensure compliance with all European and national obligations.

Source:  Tata Steel