You’ve probably dropped off old metal products at your local recycling center at least once or twice. If so, you have made an important contribution to commodity markets. Like many other materials, scrap metal can be recycled and made into new products.
This not only saves raw materials, but also reduces general energy consumption and is therefore beneficial for the environment. It’s also playing an increasingly important role in industrial metal sourcing…
The Scrap Metal Market is Growing
Scrap metal has long been a lucrative commodity. Experts estimate that the global scrap metal market generates annual sales of nearly $60 billion. And it’s grown considerably in recent years, thanks to the steel boom. The steel industry has long used large quantities of scrap in the production of this important material.
As an investor, you can bet on the growth market for scrap metal. In view of the current situation, I would like to introduce you today to a stock from the USA that is now seeking to gain a foothold in this sector.
In Focus: Cleveland-Cliffs (NYSE:CLF)
Cleveland-Cliffs operates a number of iron ore mines in the USA and is the country’s largest producer of iron ore pellets. These are an important input for steel production. But Cleveland-Cliffs is also a leader in steel itself. According to its own information, the company is the largest producer of flat steel in the USA.
The Cleveland-based company thus combines both raw material extraction and steel production under one roof. What has been missing so far is the scrap metal business. But that is now set to change.
Cleveland-Cliffs Swallows Metal Recycler FPT
A few days ago, Cleveland-Cliffs announced that it had acquired Ferrous Processing and Trading Company (FPT). FPT, based in Detroit, is one of the largest processors and sellers of ferrous scrap in the United States. The company’s 22 scrap processing facilities collectively account for about 15% percent of the U.S. market.
Cleveland-Cliffs plans to now have its scrap metal processed by FPT and then reuse it in its own steel production. Of course, FPT will also continue to supply external customers with scrap metal and recycled products – including other steel companies and automotive suppliers.
Strong Potential After the Merger
In any case, Cleveland-Cliffs is forecasting strong growth figures for the new business. And it had better see some growth, since it has put $775 million on the table for the acquisition.
The acquisition will enable the company to optimize productivity in its steel mills without having to create new raw material production capacity, Cleveland-Cliffs said in a press release. It will also benefit from the increasing demand for scrap metal from other industrial groups, and will decrease its carbon footprint through the acquisition.
High Iron Ore Prices Boosted Q2 Results
But now to the hard facts: Cleveland-Cliffs was able to generate impressive figures in the second quarter of 2021. This was mainly due to high iron ore and steel prices. Sales nearly quintupled in the quarter to around $5 billion, while operating earnings EBITDA shot up even more sharply from -$54 million to $1.4 billion.
Yet the stock is still relatively cheaply valued. According to Marketscreener, the average analyst price target is currently just under $30 per share – about 35% higher than Wednesday’s price level.
Indeed, Cleveland-Cliffs could see substantial growth from the FPT acquisition. The market environment in terms of scrap metal certainly speaks in favor of this.
The Iron Ore Rally is Over… For Now
However, we should consider that the strong Q2 figures were primarily made possible by high iron ore prices. At the end of August, however, the commodity dropped significantly and is currently trading at roughly the same level as at the end of November 2020, which means that the company’s upcoming income statements are unlikely to be quite so exultant for the time being. The next date to remember is October 22. That’s when Cleveland-Cliffs will present its third-quarter figures.