U.S. Steel bidding war shines light on scramble for electrical steel

The bidding war for U.S. Steel could have big implications for a burgeoning domestic market for electrical steel — an ultrathin material vital for the auto industry as it makes more electric vehicles.

Electrical steel is a relatively niche segment, accounting for only about 1 percent of global steel production, but it is growing rapidly.

The material is difficult to make. It is rolled into sheets about 1-millimeter thick or less to be used in electric motors, transformers and generators. It contains silicon, and has magnetic properties well-suited for such electrical products.

U.S. Steel is well aware of the importance of the material, and it is spending billions to ramp up production of products such as electrical steel as it aims to lay claim to emerging opportunities in EVs.

Thanks to a recent investment in one of its mills, U.S. Steel now has a "near monopoly" on the domestic production of non-grain-oriented electrical steel, said John Anton, pricing and purchasing director at S&P Global Market Intelligence. And U.S. competitor Cleveland-Cliffs, the steel giant that kicked off the bidding war for U.S. Steel by offering $7.3 billion, has a "near monopoly" on grain-oriented steel.

Grain-oriented electrical steel is used in transformers and other static machinery that needs unidirectional magnetization, while non-grain-oriented steel is used in electric motors, generators and other rotating machinery that needs magnetization in multiple directions, according to S&P Global.

Should Cleveland-Cliffs be successful in its bid, it will effectively corner the U.S. market for electrical steel by having vast control over domestic production of both types of the material, Anton said.

"If I'm a person who makes motors and transformers, well, now I'd only have one person to deal with," he said. "While it's easier to deal with just one company, it's going to be one that's really, really powerful."

The auto industry is sending demand for electrical steel soaring as manufacturers prepare to roll out dozens of new electric models in the coming years. The electric motors those EVs need rely on electrical steel, and the steel industry is scrambling to keep up with demand.

"You could think of electrical steel almost as a sleeping market within the steel industry up until maybe two or three years ago, but not anymore," said Frank Hoffman, associate director of consulting at S&P Global Market Intelligence.

Securing enough electrical steel for the auto industry will be easier said than done, however. Electrical steel production, like production of other types of steel, has been dominated in recent decades by producers in China, Japan and South Korea.

"The U.S. has some really ugly protectionism against Chinese steel," Anton said. "The U.S. can't import [electrical steel], so it's really helping the motor and electrical machinery industry in Mexico."

An October 2020 investigation by the U.S. Commerce Department found that foreign producers looking to duck steel tariffs put in place by the Trump administration began shipping electrical steel into Mexico and Canada and processing it into components there that were then imported into the U.S.

Gaining auto business with electrical steel could be crucial for steelmakers since they might lose business to aluminum companies as electrification ramps up.

The fight between aluminum and steel is the automotive industry's new grudge match.

The amount of aluminum in vehicles is expected to surge, according to a study conducted by consulting firm Ducker Carlisle for the Aluminum Association, which represents U.S. aluminum producers.

EVs are driving much of the growth since aluminum is lighter than steel, making it an attractive alternative for automakers looking to shed weight and boost battery range. The study found that the average battery-electric vehicle in 2022 had aluminum content of 885 parts per vehicle, 85 percent more than other models and up from 643 parts per vehicle in 2020.

The authors of the study expect housings for batteries, e-motors and e-drives to generate continued growth in the decade ahead.

"Our industry is making major bets that the total volume of aluminum is going to go up in the automotive fleet" as electrification accelerates, Aluminum Association CEO Chuck Johnson told Automotive News.

According to the association, aluminum companies have invested about $9 billion in domestic manufacturing since 2013 — driven in large part by a sharp rise in demand from the auto industry. That includes Novelis Inc. in 2022 committing $2.5 billion to build a recycling and rolling plant in Alabama.

It even includes Steel Dynamics Inc.'s plans to spend $1.9 billion to open a flat-rolled aluminum mill in the southeastern U.S. Rising demand from the auto industry in part drove its investment, the company said.

"We haven't seen a new rolling mill in North America of this type since the early 1980s," Johnson said.

"Those are going to be the huge mills that will be supporting the manufacturing of products that will be important to the auto industry in the future."

These commitments are putting pressure on the steel industry to maintain its dominant position in automotive by investing in lighter products, including electrical steel that's crucial for e-motors.

New electrical steel capacity is coming online in the U.S. this year. U.S. Steel will ramp up production of its InduX electrical steel product at Big River Steel facility in Osceola, Ark., which the company acquired in 2021. The steelmaker is investing $450 million there to produce up to 200,000 tons of non-grain-oriented steel a year.

Geopolitical uncertainties and new federal EV incentives will likely further boost demand for more domestic electrical steel capacity, especially as international automakers and suppliers look to localize their supply chains in North America.

But it could take years for new capacity to come online. Even with no red tape, the fastest a steel company could get an electrical steel mill up and running is 18 months, Anton said. A more realistic timeline is three to four years.

Compounding the tension is the lingering national problem of finding enough new manufacturing workers to deliver the new capacity. Even obtaining the machinery needed to build the massive electrical furnaces for the mission will be tough, Anton said.

Companies already in the electrical steel manufacturing segment are extremely protective of their processes. Each has a patented process for producing electrical steel and defends that vigorously in court. That means any newcomer needs to find its own way to produce electrical steel, further complicating the push to increase domestic production.

"You can't just come in and do business unless you have a patent," Anton said. "It doesn't allow a wildcat or a disrupter to come in and disrupt."

The good news for automakers is that they are at the top of steelmakers' lists, ahead of more traditional industries in this space. Electronics producers such as Siemens and General Electric are finding that securing electrical steel is harder as automakers gobble up more capacity, Anton said.

Steel suppliers "see automakers as the future," he explained. "If you have to pick and choose between customers, you're going to make someone angry. Are you going to make your traditional business angry, or are you going to make your exciting growth market angry?"

Each automaker wants its version of electrical steel with different specifications for its products. But generally, all are looking to take this paper-thin material, typically about 1-millimeter thick, and make it even thinner — to 0.35 or even 0.25 millimeters.

"There's a direct correlation between performance and efficiency and thinness," Hoffman said. "As range and efficiency become a bigger deal, they're looking to use a thinner product."

That could slow down production, though. Rolling steel as thin as 0.35 millimeters could result in the material being punctured if something as small as a grain of sand finds its way onto the roller.

So even if new mills come online promising as much as hundreds of thousands of tons of electrical steel a year, the actual figure could be significantly lower. Should automakers demand thinner material, steelmakers would need to slow down to ensure quality, Hoffman said.

"When mills announce capacity, it's assumed at a certain thickness," he said. "If you go thinner, you're not going to be able to produce as much throughout the year."

The complex nature of building up electrical steel capacity gives an advantage to U.S. Steel and Cleveland-Cliffs, since they already have U.S. mill capacity. That's one reason why U.S. Steel is attracting interest from potential buyers.

On Tuesday, more than two weeks after dismissing Cleveland-Cliffs' initial takeover offer, U.S. Steel said in a letter to shareholders it has begun signing confidentiality agreements and exchanging due diligence steps with interested parties as the company considers options.

The steel producer said it is signing agreements with "numerous third parties."

"While we don't know how long the process will take, the board of directors, management team and outside advisers are moving quickly to complete it," U.S. Steel said.

The United Steelworkers will have a say in any potential sale of mills or assets where any of its members are part of the work force. If U.S. Steel accepts a "bona fide" offer, the union has the right to make its own bid. The company isn't obligated to accept it, but it can't accept another deal unless it's superior to the United Steelworkers offer.

Tom Conway, president of United Steelworkers, said nearly two weeks ago that the union would transfer to Cliffs its right to launch a future counteroffer. Conway has repeatedly said the labor group will exclusively support Cliffs on any takeover proposals.

No matter who buys U.S. Steel, or if it ends up not being sold, it's clear the electrical steel the company makes in Arkansas will be in high demand, a fact reflected in lengthening order lead times.

Anton recalled speaking with a steel mill executive who detailed just how long those lead times are. "We aren't taking orders for 2026 yet, but if we were, we'd be sold out already," he was told.

Bloomberg contributed to this report.