Cleveland Cliffs
Upon announcement of the deal, Cleveland Cliffs' stock plunged more than 12%, although this dip was quickly bought. AK Steel shares are 10% higher. The bullish reaction shows that investors see promise in the tie-up.
Rationale for Deal
The rationale is to form a vertically integrated company combining Cleveland Cliffs' iron ore production with AK Steel's rolled and stainless steel operations. Cliffs hopes that the deal will result in more predictable revenue, faster growth, and cost savings of nearly $120 million. This is significant given that the combined entity is worth around $3 billion. A vertically integrated company will have a better chance of surviving and thriving given that weakness in iron ore prices or steel will offset each other.
Lackluster Performance
Both Cleveland Cliffs and AK Steel have struggled in recent years like most of its peers given the oversupply of steel and iron ore and limp global demand. Over the past decade, Cleveland Cliffs' stock is down 75%, while AK Steel is 85% lower. Compare this to the S&P 500's
President Trump's campaign promise to rescue the steel industry has not really been successful despite his numerous tariffs and boisterous rhetoric. Weakness in energy prices has led to decreased demand from oil and gas drillers. The price of hot rolled steel is 30% lower since the implementation of Trump's tariffs. This shows that placing tariffs in an environment of sagging demand is a fruitless endeavor.
Steel companies are posting losses. Weaker and smaller players like AK Steel are particularly vulnerable and bankruptcy was a possibility if conditions deteriorated further given the company's debt load. The deal with Cliffs removes this possibility in the near-term. However, there's little reason for optimism. The industry is plagued with oversupply and more supply is coming onstream in the coming years. Years of steel stocks underperforming have not resulted in supply being cut in any meaningful way.
