Lourenco Goncalves, Cleveland-Cliffs’ chairman,
president and chief executive told Jo
Isenberg-O’Loughlin about the
company’s plan in a recent interview.
Goncalves admits to harboring growing concerns earlier this
year over the spread of Covid-19 and the ramifications of the
global pandemic not only on Cleveland-Cliffs Inc’s
traditional iron ore operations, but also on the pending
startup of a $1-billion, 1.9-million tonne-per-year hot
briquetted iron (HBI) plant in Toledo, Ohio and future plans
and progress of Cliffs’ acquisition of
Westchester, Ohio-based AK Steel.
The all-stock transaction, completed on March 13, 2020,
implied a total enterprise value of approximately $3.0 billion
for AK Steel and immediately transformed Cliffs into one of the
largest vertically integrated producers of value-added iron ore
and steel products in North America. "I believe AK Steel is a
diamond in the rough," Goncalves commented on the acquisition.
"And we will execute. Of course, this pandemic was not in the
plan," said Goncalves.
"The virus really didn’t scare me," he recalled in
late April. "What scared me was if I couldn’t
counter it," he said.
Wasting no time and "with absolutely no guidelines,"
Cliffs’ top executive and his management team set
out to develop and implement a variety of countermeasures to
slow the spread of the virus. Steps ranging from marking spots
spaced six feet apart on the plant floor for social distancing
to developing rules of engagement – backed up by "spot
checks" at the plant gate – calling for employees to
take their temperature at home and to stay home if the reading
indicated a fever.
"We acted very early in the game," Goncalves said, noting
that Cliffs sent employees at work home on March 9, well ahead
of Ohio Governor Mike DeWine’s issue on March 22
of Stay-At-Home orders for all but essential businesses, of
which steel and steel-related businesses were deemed one. As
Goncalves pointed out, a number of the countermeasures
pioneered by Cliffs’ management team found their
way into the guidelines published by the Buckeye State. "We are
very proud of that because we were able to act in a way that
protected against the proliferation of this horrible disease
across our operations," he noted.
Although Cliffs did not announce its intention to acquire AK
Steel until early December of 2019, the roots of the
transaction date back several years to when the Ohio steelmaker
was evaluating its investment in, and ongoing relationship
with, Magnetation LLC, a joint venture between Magnetation Inc.
(50.1%) and AK Iron Resources LLC, an affiliate of AK Steel
Corp (49.9 %).
Magnetation specialized in recovering high-quality iron ore
concentrate from previously abandoned iron ore waste stockpiles
and tailings basins on Minnesota’s iron range.
Magnetation LLC filed for bankruptcy in June 2015.
A month later, AK Steel announced that it had recorded a
$256.3-million write-down of its investment in Magnetation LLC.
The steelmaker paid an additional $37.5 million the following
year to end its iron ore pellet supply deal and sever its
relationship with the one-time supplier.
"When they came to Cliffs, AK Steel was still taking pellets
from their subsidiary company, Magnetation," Goncalves recalls.
He went to work and was able to prove to AK Steel that it was a
better business decision to buy 100% from Cliffs.
"Things probably started to ignite a spark inside AK Steel
and AK realized they were dealing with a business savvy
company, Cleveland-Cliffs," he said. "Since then, I have been
watching them and preparing for this acquisition.
"This is not just something that I woke up one day and
thought let me buy AK Steel," Cliffs’ top
executive emphasizes. "That’s not how I operate. I
had all my ducks in a row."
Among those ducks were a series of proactive financial moves
including a super-sized ABL (asset-based loan). "We were
starting to really make headway in February," Goncalves
recalls. "Instead of dragging my feet, I actually accelerated
the process. I had to put in place a $2-billion ABL in order to
take care of the combined business of the company.
"I was really afraid that if I had waited any longer, I
would not be able to put in place a jumbo, $2-billion ABL," he
acknowledged. "That is a lot of money."
He was successful in doing that and actually closed ahead of
the planned date. "We closed on March 13 and
that’s pretty much when the pandemic really began
to hit hard."
When Cliffs first publicly announced its intention to forward
integrate into value-added steel production, it described the
proposed acquisition as delivering on "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."
At the heart of that customer base is the US auto industry,
which is currently gearing up production after a widespread
wave of shutdowns forced by the pandemic and is itself in the
midst, Goncalves insists, of a technological and
social/psychological transformation spurred by Covid-19.
Although Cleveland-Cliffs was not a direct supplier to auto
manufacturers prior to the AK Steel acquisition, it is by no
means a stranger to the automotive market and its ups and
"Standing alone, Cleveland-Cliffs supplies Algoma, AK Steel,
ArcelorMittal and ArcelorMittal Dofasco," Goncalves noted.
"Among those four companies, three have a lot of exposure to
automotive. So, our exposure to automotive was already there.
The difference now is that instead of being a captive victim of
whatever happens in automotive, I am a very active participant
in what happens in automotive," he emphasized.
"Now, we are on the front line," he added. "Now, we are the
ones that are making the commercial decisions that will make or
break not only AK Steel but Cleveland-Cliffs as a whole."
Since March 13 when the AK Steel acquisition was signed,
sealed and delivered, Cliffs has made a series of decisions
resulting in the temporary idling or permanent shutdown of
members of its expanded family of iron ore mining, metallic and
steelmaking assets. A week after the transaction was finalized,
and in reaction to the spread of Covid-19, Cliffs announced
plans to temporarily cease construction activity at its Toledo
HBI plant, effective end-of-day March 20.
Citing market conditions, Cliffs disclosed on April 13, 2020
that it would idle production at its Northshore Mining
(Michigan) and Tilden Mine (Minnesota) iron ore mining
operations. The company said at the time that it would work
down then current inventory levels at the two locations and
continue to ship iron ore to fulfil its commercial agreements
with steel customers.
Further downstream, and in direct response to the
Covid-19-induced crash of the auto market, the company rushed
to adjust its output of automotive steels. "Because most of our
exposure to automotive steel product is on a just-in-time
basis, we had to make immediate adjustments through a large
portion of our production," Goncalves told analysts in a May 11
conference call. As part of those efforts, steel output was
curtailed at the company’s Dearborn, Michigan, and
Middletown, Ohio, Works and all operations ceased at Precision
Partners Holding Co.’s plants.
Acquired by AK Steel in August 2017 for $360 million in
cash, Ontario-based Precision Partners is a leading North
American producer of engineering tooling and hot and cold
stamped products. It specializes in tool and die engineering
and the production of complex stamped components for autos.
"They sell steel per part. They don’t sell steel
per ton," Goncalves pointed out, underscoring the value-added
nature of Precision Partners’ business.
While the majority of the adjustments undertaken are seen as
temporary, one facility – the hot strip mill (HSM) at
Dearborn – is being permanently idled. "One thing we
found in due diligence is that the Dearborn hot strip mill was
a weak link," Goncalves told analysts in a conference call.
"Given the strength and capabilities of the Middletown Works
hot strip mill, the Dearborn HSM is not necessary and
sub-optimal to operate."
Three years before selling what was then its Dearborn Works
to AK Steel in September 2014, Severstal North America, a
subsidiary of Russian steelmaker OAO Severstal, completed a
large-scale $1.2-billion modernization of the plant. Included
as part of the revamp package was the installation of a new
pickling line, cold tandem mill and hot dip galvanizing line.
AK paid $707 million in cash (including $314 million in working
capital) for the integrated steelmaking complex.
When the Dearborn Works resumes production under its new
owner, the finishing facility there – which Goncalves
considers "at par with our flagship Rockport Works"–
will be fed with and will process hot-rolled coils produced on
Middletown’s hot strip mill. "We estimate this
improvement will save us several million dollars in annual
costs even after considering the additional freight to move
slabs and coils between the two plants," he told analysts.
Going forward, Goncalves said in a Q1 conference call,
Cliffs’ wholly owned AK Steel subsidiary will be
– A fully integrated steel mill in Middletown,
– Two electric-furnace-based steel mills; one in
Butler, Pennsylvania, and one in Mansfield, Ohio.
– One slab reducing plant in Dearborn,
– Two steel finishing plants, one in Rockport,
Indiana, and one in Dearborn, Michigan, with both dedicated
primarily to automotive carbon steels and other
– Two finishing plants dedicated to stainless and
– Two ERW plants dedicated to the production of
tubular components for automotive and other high-end
applications, operating as AK Tube LLC in Walbridge, Ohio and
in Columbus, Indiana.
– A network of high-tech plants dedicated to
provide engineering hot and cold stamped products and
assemblies for the auto sector, operating as Precision
Partners Holding Co.
Missing from that list, and once considered a candidate for
possible restart, was a blast furnace (BF) equipping AK
Steel’s idled Ashland, Kentucky Works. Early on,
Cliffs was mulling the possibility of relighting the BF to
produce merchant pig iron for EAF consumption. A subsequent
market analysis convinced Goncalves, however, that electric arc
furnace (EAF) steelmakers would not be buying pig iron simply
because domestically produced pig iron is available.
"In other words, the EAFs would not be producing exposed
parts for automotive even if they have pig iron available,
because that’s not the restriction to produce
exposed parts," he shared a key conclusion of the market
analysis. "We really realized that we are getting to a point
with our HBI that we are pretty much optimizing the market for
EAFs," Goncalves told investors participating in a virtual
annual meeting of shareholders held April 22. "And when I
realized that the EAFs would not be able to get there, I also
realized that there was an untapped potential with AK Steel
that I could develop."
While the economic and human devastation that Covid-19 has
visited on the world defies measure, the pandemic brought with
it several unexpected benefits for Cliffs and its newly
acquired steelmaking subsidiary. Potential and already realized
pluses range from an accelerated "fix" of AK’s
existing Just-In-Time (JIT) delivery system to automotive
customers to a mounting deficit in industrial scrap generation
expected to sweeten the prospects for the high carbon content
(3%) hot briquetted iron produced at its almost completed HBI
Although an exercise in due diligence convinced Gonclaves
that AK Steel’s automotive product was good, he
did see room for improvement in terms of inventory and JIT
delivery. "I don’t think AK was worse than any of
the competition," he said. "But it was not up to the standard
that I would like to see. The clients are very demanding.
"The plan going in was to fix those inventories, an effort
which would take over a year while supplying the client," he
added. "But due to the auto plant shutdowns forced by the
pandemic, we were actually able to achieve that in 30
Upstream of the finished steel shipping bay, the shutdown of
the country’s automotive manufacturing plants has
had a marked impact on the supply of ferrous scrap. "Scrap is
being consumed but it is not being generated," Goncalves sizes
up the situation succinctly.
"With the extended outage of the entire automotive industry,
there has been no busheling scrap being generated in our
country," Cliff’s top executive told analysts in a
May 11 conference call. "This unprecedented step has tightened
the market considerably and we now believe that the actual
demand for our HBI will be even better than the good demand we
were anticipating before the pandemic."
Although it is too early – due to Covid-19
considerations – to set a firm timeline for the
startup of Cliffs’ Toledo HBI plant, once
contractors are able to return to the construction site and
begin work, completion of the plant is expected to take about
three months. And there are customers waiting. Earlier this
year, Goncalves welcomed Nucor Corp, David J Joseph Co, Steel
Dynamics Inc, Omnisource LLC, Big River Steel, North Star Blue
Scope Steel and several others to Cliffs’ list of
Looking back over what Cliffs has achieved since it
officially welcomed AK Steel into its corporate fold on March
13, Goncalves cited what he characterized as "two great
One was capturing a promised $120 million in year-one
savings due to synergies "way ahead of schedule," Goncalves
told analysts in mid-May. "And we are confident the final
number will be fairly higher," he went on to say.
The other was successfully convincing the US Department of
Commerce to self-initiate a 232 investigation on transformer
laminations and cores of grain-oriented electrical steels
(GOES), transformers and transformer regulators. AK Steel is
the sole producer of GOES in North America, with the market for
the material in the US estimated at approximately 250,000 tons
"And that [the investigation] is a real game changer in
comparison with what was out there prior to our acquisition of
AK Steel," Goncalves claimed. What was out there, he insists,
was a blatant case of circumvention.
"It blows my mind that the Section 232 was not enough to
preclude bad players from circumventing the trade remedy and
bring electrical steel into the country," Goncalves
"This blatant circumvention activity has degraded the
domestic electrical steel market and now threatens the
viability of Cleveland-Cliffs continuing to produce GOES,"
Goncalves warned in a statement.
Cash for clunkers
For all its importance to America’s
national security and the country’s electrical
grid, GOES runs a distant second to automotive steels in AK
Steel’s value-added product portfolio. The
automotive market is not only AK’s bread and
butter, it is in the midst of what Goncalves calls "a moment of
"It doesn’t happen very often," he allowed. "By
and large it is a very conservative industry. But right now,
automotive is going from the internal combustion engine to the
"AK Steel Research & Innovation has been playing and
will continue to play a very important role in supporting the
efforts of all going into electrical vehicles – EVs,"
Goncalves said. "Through our subsidiary AK Steel,
Cleveland-Cliffs is going to be a very important player in the
electrical vehicle arena in the very near future," he
Although Covid-19 has taken a sledgehammer to automotive
output in the early months of this year, Goncalves again sees a
silver lining or two delivered by the onslaught of the virus. A
growing sentiment against – and potential fear of
using – ride-share services counts as one. The
negative sentiment is expected to translate into increased auto
sales, as is an emerging view of individually owned vehicles as
the ultimate in personal protection equipment.
Encouraged by the restart of automotive manufacturing plants
last month and what he is seeing in AK Steel’s
order books, Goncalves has gone a step further. "I have been
working with my friends in Congress to re-introduce
Cash-For-Clunkers again," he said.
"Cash-for-Clunkers was the most important initiative
implemented in the United States after the last recession," he
insisted. "I believe that without Cash-For-Clunkers, the
outcome of that recession would have been completely
"We are at the right time to make a big push for that,
because there is nothing other than the consumer that moves the
economy," he argued. "It would be a good thing if we use that