Stelco’s Lake Erie Works in Nanticoke, Ont.Stephen C. Host/The Canadian Press
The reborn Stelco plans to return to profitability by muscling back into the market for automotive steel, but its attempt to grab back auto business comes as vehicle sales and production begin sliding from their current peak.
"We have returned as a low-cost, integrated and independent steel maker focusing on regaining our stature as an industry leader," Stelco Holdings Inc. said in a prospectus for an initial public offering designed to raise $150-million.
The steelmaker, which lost $858-million from 2014 to 2016 after being granted protection under the Companies' Creditors Arrangement Act in September, 2014, said it has a clean balance sheet after eliminating $3.1-billion in debt and $1.4-billion in pension and benefit obligations during the restructuring.
In the three months ended June 30, Stelco posted an operating profit of $25-million, compared with $8-million a year earlier. It recorded a $3.67-billion gain on emergence from CCAA arising from the elimination of debt and reduction in pension and benefit costs.
Much of the recovery plan is aimed at the auto market, which represented just 3 per cent of Stelco's business in 2016, the regulatory filing said. Sales to automotive customers accounted for 37 per cent of Stelco's business in 2006 – the largest share – one year before it was purchased by United States Steel Corp. (USS).
"Following arrangements entered into with USS in October, 2015, to establish operational separation, we assumed responsibility for all of our own sales and marketing activities and have subsequently developed a marketing and sales strategy to grow our business," the Canadian company said, "including once again sourcing business directly from [auto makers.]"
The steel produced in the company's Lake Erie Works in Nanticoke, Ont., and its Z-line galvanizing operation in Hamilton is considered high quality by auto makers.
The auto market is attractive to steelmakers in part because it represents large tonnage contracts, but also because car companies buy set amounts of steel at predetermined prices, leaving steel companies less vulnerable to the spot market where prices fluctuate dramatically and demand ebbs and flows.
The biggest chunk of Stelco's business in 2016 came, for example, from steel service centres that process the commodity before shipping it to customers, but typically don't sign long-term deals. That market was 55 per cent of Stelco's business last year, compared with 35 per cent in 2006.
Stelco, now owned by private equity firm Bedrock Industries LP, said it will use some of the money it raises to upgrade its Lake Erie Works and the Z-line mill in Hamilton.
"Management is focused on re-establishing commercial and development efforts on producing advanced high-strength steel [AHSS] and ultra-high strength steel [UHSS] grades," the prospectus said. "These steels are stronger and lighter than traditional grades of steel and are being increasingly used by automakers to achieve improved fuel economy without compromising safety."
North American vehicle production is expected to fall this year to 17.3 million from 17.8 million in 2016, consulting firm IHS Markit said in a forecast released this week.
Output is scheduled to rise slightly to 17.5 million next year, 17.6 million in 2019 and 17.9 million in 2020, which indicates just a mild dip in sales.
"We believe the 'eroding plateau' U.S. seasonally adjusted annual rate outlook is much more appropriate than the bearish 'fall-off-the-cliff outlook," Barclays Capital Inc. auto industry analyst Brian Johnson said in a research note.