ArcelorMittal Close To Buying U.S. Steel Plant With Nippon Steel?

by Trefis Team
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According to the Japanese newspaper NikkeiArcelorMittal (NYSE:MT) and Nippon Steel may be close to concluding a $1.97 billion deal with ThyssenKrupp of Germany, to buy the latter’s steel-rolling mill in Alabama. It has been speculated for some time now, that the two partners are making a joint bid for the plant that manufactures automotive steel sheets, aiming to more than double their combined production capacity in the United States.

Both ThyssenKrupp and ArcelorMittal have declined to comment on the latest developments. While ThyssenKrupp pointed to its statement on November 19 that it was in exclusive talks with potential buyers for the plant, ArcelorMittal pointed to its statement on November 7 that said the company was interested in the plant. Nippon Steel couldn’t be reached for comments. [1]

It is believed that ArcelorMittal and Nippon will split the costs evenly and all specifics will be announced early in December.

We have a  price estimate of $16 for ArcelorMittal, which is near the current market price.

See our full analysis for ArcelorMittal

The Steel Plant In Question

ThyssenKrupp’s steel plant in Alabama being sold under the deal is a state-of-the art facility that went online in 2010. However, the company has been losing money on the plant due to its failure to find customers and has been looking for a buyer for the plant for about a year-and-a-half.

ArcelorMittal has termed the plant a world-class asset in the past in terms of quality and capability, and has been keen on buying it. The only factor holding it back has been the need to find a joint-venture partner in order to alleviate antitrust concerns. Since it already holds a 37% market share in the North American Free Trade Area, being the sole buyer would have attracted scrutiny.

The Alabama steel plant has an output capacity of about 2.2 million tons a year, and manufactures automotive and construction steel. The proposed deal to acquire the plant will double the combined production capacity of Nippon Steel and ArcelorMittal in the U.S. to 4.2 million tons. Nippon is a good fit for ArcelorMittal as the two companies already jointly produce 2 million tons of steel for automobiles in the state of Indiana, but have experienced capacity shortages. [2]

The Automotive Part Of the Equation

Despite the plunge in the yen’s value against the dollar in recent times, Nippon Steel believes that Japanese automakers will continue to shift production overseas. If this deal takes place, these companies will be assured of a stable supply of steel and further confident of their ramp up plans in the U.S. Also, according to IHS Global, the output of passenger vehicles in North America is expected to reach 18.15 million units in 2020. Therefore, there will be no dearth of customers for the steel produced at Alabama.

Of the combined capacity of 4.2 million tons, highly durable zinc-coated steel sheet used for auto bodies and other applications will account for around 1.5 million tons. This amounts to nearly 30% of the demand in U.S. for such type of steel. [3]

ArcelorMittal has been focusing hard on its automotive steel business segment and has committed itself to spend on acquiring market share as well as invest in research and development.

Regulations in the automotive industry are evolving. There is an increasing focus on fuel efficiency and enhancement of passenger safety. This poses the contrasting challenge of using strong material for the body of the vehicle while making it lighter. With the advent of electric and hybrid vehicles, the requirement for lighter materials is expected to increase all the more. ((ArcelorMittal Investor Day Presentation, ArcelorMittal Website))

ArcelorMittal has a sizable presence in both Europe and the U.S., which have introduced tough regulations related to fuel efficiency and emissions from tailpipes of cars. Regulations related to tailpipe emissions will come into full force in Europe in 2015, while tailpipe emissions and fuel economy regulations in the U.S. are expected to be enforced in 2021. For automobile manufacturers, this means that they would have to lower the weight of cars to reduce fuel consumption and tailpipe emissions in order to meet regulatory requirements.

ArcelorMittal is not only developing a portfolio of products to meet the automotive industry’s requirement, but also ramping up production capacity as evident from its efforts to acquire ThyssenKrupp’s Alabama plant. It has a number of other ongoing ventures around the world to serve the automotive market. [4]

Understand on Trefis how a company’s products impact its stock price

  1. ThyssenKrupp to sell U.S. plant for $1.97 billion: report, Reuters []
  2. Nikkei: ArcelorMittal, Nippon Steel To Buy ThyssenKrupp’s US Plant For $1.97 Bln, RTT News []
  3. Nippon Steel, ArcelorMittal to Buy U.S. Auto Steel Plant, []
  4. Investor Conference Presentation, ArcelorMittal Website []
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