Make hay while the sun shines. arcelormittal has followed the old adage with a sale of its us operations to cleveland-cliffs for an equity price of $1.4bn. after a tough year the deal is difficult for investors to argue against. a rally in steel prices ensures a reasonable valuation. cash proceeds of $500m will fund buybacks. the ray of light helped lift shares in the luxembourg-based group by a tenth on monday.

European steel businesses have historically blamed china, the worlds largest producer, for low prices due to dumping. but arcelormittal has benefited from higher prices triggered by chinas determination to build its way out of the pandemic slowdown. steel exports from china fell to a seven-year low. prices for hot rolled coils rallied some 15 per cent from april.

Dual-scale chart showing that steel producers shares are tied to global prices. share price (rebased) of arcelormittal, united states steel, nucor and steel dynamics  against hot rolled coil/plate price index

Chief executive lakshmi mittal hopes the disposal will mark a turning point. deleveraging is over, signalling better prospects for shareholders. they backed a $2bn cash call in may. the proceeds helped push net debt down to $7.8bn in june, within grasping distance of a $7bn target.

Cleveland-cliffs is assuming about $500m of arcelormittals net liabilities, easing debt levels further. it will also take on $1.5bn in pension commitments. the us group is paying $500m in cash and $900m in shares and preference shares. that gives arcelormittal an interest in how the acquirer runs its least profitable operations in north america.

Dual-scahle chart showing chinese steel production (million tonnes) against exports as a percentage of production

Iron ore miner cleveland-cliffs moved into steel production with the purchase of ak steel in march. it hopes to sharpen margins with an estimated $150m of annual savings. an approximate six times ebitda for the deal bests that of arcelormittal, which is trading at about five times forward ebitda.

Chart showing us & canada blast furnace capacity, million tonnes. total capacity/operation from jan 3, 2020 (pre-covid) to 24 aug, 2020

A slowdown in chinese construction activity and resumption of manufacturing elsewhere have put a lid on further price gains. arcelormittal has plenty of cash to cover near-term outflows. the buyback will hearten diehard shareholders. but the industrys historic overcapacity and politicised status mean only those with nerves of steel should invest.

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