Potential Volatility Ahead for Steel Stocks as U.S. Steel Explores Strategic Alternatives

Investors in steel stocks should prepare for a potentially turbulent trading week as United States Steel (ticker: X) considers its future. The iconic steel company, founded by Andrew Carnegie and J.P. Morgan in 1901, recently announced its exploration of strategic alternatives following the receipt of several unsolicited proposals from interested parties.

According to CEO David Burritt, these proposals range from the acquisition of specific production assets to potential consideration for the entire company. In response, the board is taking a methodical approach, seeking additional information to thoroughly evaluate preliminary proposals that are currently undergoing due diligence and review.

One of the offers appears to have come from Cleveland-Cliffs (CLF), which revealed its proposal on Sunday. Cleveland-Cliffs suggested purchasing U.S. Steel for $17.50 per share alongside 1.023 shares of Cliffs' stock, placing the total value at approximately $35 per share. For reference, U.S. Steel's stock closed at $22.72 on Friday.

In a public statement, Cliff CEO Lourenco Goncalves shared that he initially presented the proposal to U.S. Steel's CEO and board on July 28th. Despite believing the offer to be generous and reasonable, it was ultimately rejected by U.S. Steel's board, leading Goncalves to now make the proposal public in an effort to facilitate meaningful dialogue between the two companies.

As discussions unfold and proposals continue to surface, steel stocks could experience significant volatility in the coming days. Investors should closely monitor developments as the future of U.S. Steel hangs in the balance.

The Changing Steel Industry Landscape

Goncalves, the mastermind behind Cliffs, has played a key role in transforming it into the biggest producer of flat-rolled steel in North America. This feat was achieved through strategic acquisitions, including AK Steel and the North American steel operations of ArcelorMittal (MT). These flat-rolled products are utilized in various everyday items such as car doors and filing cabinets. On the other hand, long products, including structural beams and rebar, have their own distinct purpose.

In the event of a merger between U.S. Steel and Cliffs, a colossal company with a steel capacity of approximately 30 million tons would emerge, further bolstered by substantial iron ore assets. With this milestone, the new entity would outrank all others in the country, positioning itself as the largest steel producer in America, as confirmed by data from the World Steel Association. The second-largest contender would then be Nucor (NUE).

It's intriguing to note that nine out of the fifteen largest steel companies globally are located in China. China alone contributes over half of the annual production of 2.1 billion metric tons of steel worldwide. In contrast, the United States produces roughly 100 million tons but is heavily reliant on importing finished steel products. Being a net importer results in the global steel prices largely determining the prices that U.S. producers can charge.

The potential consolidation within the domestic industry holds the promise of benefiting producers by aligning supply and demand more efficiently, which, in turn, can lead to higher profit margins.

The prospect of consolidation is likely to be received positively by investors. U.S. Steel stock has experienced a decline of approximately 9.3% this year and has depreciated by around 10% over the past twelve months. Likewise, Cliffs stock has seen a decrease of about 9% so far this year and has dropped by roughly 25% over the previous twelve months.

Steel stocks are currently grappling with the challenge of declining steel prices. As we enter this week, benchmark steel prices are hovering around $750 per ton, having reached their peak at approximately $1,300 per ton back in March. A year ago, the price of steel was around $800 per ton.