Why the bidding war for U.S. Steel is a worry for automakers

A bidding war between steelmakers for American manufacturing icon U.S. Steel could have massive implications for the auto industry — especially if Cleveland-Cliffs wins out, analysts said.

The Ohio company, the largest supplier of automotive steel in the U.S., rattled the manufacturing world on Sunday when it went public with a $7.25 billion offer to acquire U.S. Steel, its longtime rival. U.S. Steel rejected the deal, and instead began a review of its strategic options.

"I can guarantee you all the auto executives that were on the golf courses or at church or hanging with their families at picnics or baseball games all saw that at the same time, and their blood pressure went through the roof," said Philip Gibbs, an analyst with KeyBanc Capital Markets Inc.

That's because such a takeover would give Cleveland-Cliffs a dominance in huge swaths of the domestic market for many automotive steel products. The combined entity would have control of "well over 50 percent of the exposed auto market," Gibbs said, likely drawing the ire of automakers, whose leverage for price negotiations for steel would decrease.

But the ball is still spinning on what might happen next.

Steelmaker Esmark Inc. followed Cleveland-Cliffs' lead and made a $7.8 billion all-cash offer for U.S. Steel, which revealed it has also received other unsolicited offers.

Reuters reported on Wednesday that ArcelorMittal, the world's second-largest steelmaker, is also considering making an offer for U.S. Steel, citing people familiar with the matter.

Nor is there any indication that Cleveland-Cliffs is done with its bid.

Its proposed acquisition would create one of the world's largest steel suppliers — catapulting Cleveland-Cliffs onto the list of the 10 largest steel producers globally, with about 31 million metric tons of steel produced annually, according to a company investor presentation. The combination would result in the only American steel company in the global top 10 that's dominated by producers in China.

Gibbs said that Lourenco Goncalves, Cleveland-Cliffs' outspoken CEO, has already provoked anger in the auto industry after negotiating price increases in annual contract talks with carmakers last year. Cornering more of the North American market for automotive steel would only serve to give Goncalves a bigger seat at the table.

"Just the thought of that makes them shudder because they'd realize they've lost the negotiating leverage that they've owned effectively forever," Gibbs said. "And if you lose one more supplier at the table, and you have to deal with [Goncalves] solely in some cases for some parts, you have no leverage."

But Goncalves could find that his leverage is limited to some degree. That's because an "overwhelming amount" of global steel production is now based in China, driven by demand in the commercial and residential sectors there, both of which are in a "state of dismal decline," said Gordon Johnson, CEO of GLJ Research.

"China determines steel prices," Johnson said. "He'll try to get aggressive on pricing, but as we've seen recently with U.S. prices surging above European and Chinese prices, imports into the U.S. will surge higher, and then he'll be forced to lower prices."

Because of a large amount of overlap in the businesses of U.S. Steel and Cleveland-Cliffs, any takeover is certain to draw attention from federal regulators, Johnson said.

"There's going to be an antitrust dynamic to this," he said.

Gibbs said the steel suppliers would need to make "some concessions" to address antitrust concerns on automakers' part. Regulators would ask automakers "if they think it's anticompetitive, and they're largely going to say yes," he said.

Cleveland-Cliffs could also be outbid as competition for U.S. Steel heats up.

Esmark CEO James Bouchard told Reuters that the privately held steelmaker has $10 billion available and no debt, and is being advised by an "international bank" he declined to name that's also willing to lend with him.

A deal with Esmark could be more palatable for the auto industry because there is far less overlap between its business and U.S. Steel's than is the case with Cleveland-Cliffs and U.S. Steel, Gibbs said.

"It would basically just amount to a change of ownership, so it wouldn't really impact auto," he said.

But any bidder faces a significant roadblock: The United Steelworkers indicated it will only support Cleveland-Cliffs' bid for U.S. Steel.

Winning its approval is a necessary legal step for anyone hoping to buy U.S. Steel because the union has the right to counter, United Steelworkers President Tom Conway told Bloomberg.

"I was adamant that the Cliffs bid is the only one the union will consider due to its synergies and the fact that it best preserves blast furnace and steelmaking capacity and the jobs of USW members," Conway said.

"The union is committed to that proposal and the USS board should move quickly to conclude this transaction," he added.

U.S. Steel stock has surged since news of the bidding war broke, putting pressure on the company to make a move, Gibbs said.

"U.S. Steel is going to have to do something," he said.

Regardless of the outcome of the bidding war, the auto industry needs to brace for further consolidation in production of steel and other materials, said Michael Robinet, executive director of Automotive Advisory Services at S&P Global Mobility.

No matter the outcome of the U.S. Steel situation, steel will remain "vitally important" for the industry, he said, even as aluminum continues its ascent.

"Steel has been pretty resilient, and for some applications, it's still the best and lowest-cost material," Robinet said, "and it's likely going to stay that way for a while."

Bloomberg and Reuters contributed to this report.