How CLF Could Benefit from the USMCA



  • Cleveland-Cliffs (CLF) recently announced its acquisition of AK Steel (AKS). After an initial fall, CLF has recovered and is up 7% this month.
  • Yesterday, the US, Canada, and Mexico signed the USMCA (United States–Mexico–Canada Agreement), which will replace the North American Free Trade Agreement. The automotive and steel rules in the agreement look positive for CLF—especially after its acquisition of AKS.
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CLF and the USMCA

Yesterday, the US, Mexico, and Canada signed the USMCA for the second time. The countries made some changes to the previous agreement, which had been signed last year. Most of these changes were at the behest of the US Democrats. The new USMCA will open up the Canadian dairy market and also benefit US farmers. But let’s focus on two other important aspects of the agreement—namely automotive and steel. Cleveland-Cliffs recently announced the acquisition of AKS. AKS sells most of its steel to automotive companies. The provisions under the USMCA are positive for AKS and, therefore, CLF.

Higher regional content: A positive for Cleveland-Cliffs

In the USMCA, there’s a provision to increase regional value content. In simple terms, this means automakers will have to produce 75% of a vehicle in North America to be eligible for tariff benefits. Previously, the threshold was 62.5%. The automotive industry is among the largest steel and aluminum users, and the USMCA calls for more North American steel and aluminum in vehicles.

The US negotiating team made a last-minute demand to add more stringent provisions on steel and aluminum. Mexico met the demands halfway. Nonetheless, more North American steel in vehicles is a positive development for Cleveland-Cliffs. It could also support demand for its upstream pellet business. CLF is also investing in hot briquetted iron, which would interest minimills that produce steel for automotive customers.

However, some observers fear that the new rules might make it unviable to produce lower-margin sedans in North America, causing automakers to shift their productions to other cheaper locations.

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Brazil tariffs and Cleveland-Cliffs

Recently, President Donald Trump imposed tariffs on steel imports from Brazil and Argentina. Brazil is among the leading steel exporters to the US and mainly ships semi-finished steel such as pig iron, which is further processed in the US. Cleveland-Cliffs said that it might look at AK Steel’s idled Ashland Works blast furnace to produce pig iron. AKS idled the plant in 2015 and announced a permanent closure earlier this year. According to CLF, the plant can begin pig iron production with minimal capex.

CLF-AKS merger

Right after CLF announced its acquisition of AKS, its stock fell sharply. However, since then, it’s rebounded and is up 7.0%. In the fourth quarter so far, CLF has gained almost 20%. In CLF Acquires AKS: A Match Made in Heaven? we noted that the merger makes strategic sense. CLF’s current CEO, Lourenco Goncalves, who will lead the merged entity, has a wealth of experience that will come in handy.

For years, US steel and iron ore companies have blamed China for their struggles. Now, for a change, the sector can’t blame China for the fall in US steel prices. Read For the US Steel Industry, China’s No Longer the Villain! for more insights.


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