Introduction (00:00–01:40)
Welcome to Steelonthenet dot com Podcasts. I'm Dr. Andrzej Kotas.
A steel mill can look profitable on paper and still need tens of millions in unplanned spending within two years of changing hands. When that happens, the buyer rarely lacked information. More often, the buyer accepted the seller's version of it.
So today I want to talk about due diligence on steel assets. This is for lenders, acquirers and governments who are being asked to put money into an existing mill.
Think of it like buying a house. The buyer walks in and admires the kitchen. The surveyor goes up on the roof, checks the wiring and looks for cracks in the foundations. In a steel acquisition, the data room is the kitchen. It is clean, well lit and arranged by the seller.
In earlier episodes we looked at investment disasters and at why feasibility studies for new projects so often fail. Buying an existing mill feels safer, because the plant is already running. That feeling is exactly the problem.
So here are six red flags. Each one is something I have seen cost buyers real money, and each one has a practical test you can apply before you sign.
Red Flag One: Nameplate versus Demonstrated Capacity (01:40–03:24)
The first red flag is a business plan built on the wrong capacity number.
Every mill has a nameplate capacity. That is what the equipment supplier said it could do, under ideal conditions, with the right raw materials and a perfect product mix. Then there is demonstrated capacity. That is what the plant has actually produced, month after month, with the scrap it really buys and the orders it really gets.
The gap between the two can be large. Sellers know this, so the plan often quotes nameplate, or it takes the best month the plant ever had and multiplies it by twelve. Neither is a forecast. Both are a sales pitch.
The next step is to find the bottleneck. In most mills one piece of equipment sets the pace for everything else. It might be the caster, the reheating furnace, the transformer on the arc furnace, or even the crane that moves the ladles. Watch out for debottlenecking claims. Spend money on one constraint and you often discover the next one, a little further down the line.
The practical test is simple. Ask for thirty-six months of actual monthly production, by product, not the annual summary. Look at the average, not the peak. Look at what happened in the bad months, and ask why. That tells you what the plant can really do.
Red Flag Two: Deferred Maintenance and the Capex Holiday (03:24–05:21)
The second red flag is the one that hurts most, because it arrives after you have paid.
When an owner decides to sell, there is a strong temptation to cut spending on maintenance. Every pound or dollar not spent on keeping the plant in good order goes straight into earnings. Earnings set the price. So the mill looks more profitable in the two or three years before the sale than it really is.
In plain terms, the seller has been living off the plant. The money that should have gone into the roof has been taken out as profit. The buyer inherits the leak.
There is a simple warning sign in the accounts. Look at sustaining capital expenditure, the spending needed just to keep the plant running, and compare it with depreciation. If sustaining spend has been running well below depreciation for several years in a row, the assets are being run down.
Then look at the big-ticket items. When is the blast furnace due for its next reline? What condition are the refractories in? How old is the arc furnace transformer? What state is the roll shop in, and the cranes, and the electrical systems? These are not small bills. Any one of them can wipe out the first year's profit.
The practical test is to talk to the maintenance manager, not just the finance director. Ask what they would fix if they had the money. Then walk the plant with them.
Red Flag Three: Optimistic Consumption and Yield Assumptions (05:21–06:51)
The third red flag sits inside the cost model.
Every tonne of steel consumes things: electricity, electrodes, alloys, refractories, oxygen, and of course the scrap or iron itself. A business plan has to assume how much of each the plant will use. Very often the plan assumes best-in-class figures, the numbers a modern, well-run plant would achieve, without showing how this plant will get there.
The same applies to yield, how much saleable steel comes out for every tonne that goes in. We covered yield losses in episode six, so I will not repeat that here. The point for due diligence is simple. If the plan assumes a yield the plant has never achieved, the profit forecast is built on sand.
The test is to benchmark the plant's actual consumption rates against comparable plants. Not against the equipment supplier's guarantee figures, and not against the best plant in the world. Against plants of similar age, size and route. Where the plan says the gap will close, ask what will close it, how much that costs, and how long it takes.
Red Flag Four: Route to Market (06:51–09:38)
The fourth red flag is about who the mill actually sells to, and how.
Start with the product plan. Many acquisitions assume the mill will move up to higher-value grades. That may be possible, but customers in automotive or energy do not switch suppliers overnight. Qualification takes years. Then check concentration. If one or two customers take most of the output, you are buying their purchasing decisions along with the plant. And look for related-party sales at prices no independent buyer would pay.
But the issue I want to spend time on is traders.
Many mills sell much of their output through traders rather than direct to end users. On the surface, that looks efficient. The order book is full and the plant is running. But the trader and the mill want different things. The trader wants his margin on each deal. The mill needs a profit, and that means covering its fixed costs as well.
Let me put that in plain terms. Variable costs are the scrap, the power and the consumables that go into each tonne. Fixed costs are the wages, the maintenance and the interest, which have to be paid whether the furnace runs or not. A sale that only covers variable costs keeps the furnace running. It does not pay the bills.
I have looked at mills where billet sold through traders came within five dollars a tonne of variable cost. At that margin almost nothing is left for fixed costs. The plant is busy, and it is losing money. That is often bad business, however full the order book looks.
There is a deeper problem too. A mill that sells mainly through traders is a mill at arm's length from its market. It may not know what its customers need today, let alone what they will need in five years. That is not just a margin risk. It is a risk to future revenue.
The test: what share of sales goes through traders? How do realised prices compare with export reference prices? And does the mill have any direct relationships with end users at all?
Red Flag Five: Environmental and Legacy Liabilities (09:38–11:12)
The fifth red flag is sometimes very easy to see. You just have to look up.
I once visited a plant in Eastern Europe where slag had been dumped on site, continuously, for fifty years. The result was a mountain. Not a figure of speech. A literal mountain of old environmental liabilities, sitting next to the plant.
None of that appears in the earnings figures. But whoever owns the land ends up owning the mountain. So the questions are: who pays to deal with it, when, and does the sale contract leave that liability with the seller, or quietly pass it to you?
Slag is only one example. Look at contaminated land under old parts of the site. Look at how the plant handles arc furnace dust, which we discussed in episode three. Check whether the plant needs new equipment simply to keep its environmental permit, measured against best available techniques, which we covered in episode four. That is a compliance cost, and it belongs in the price.
Finally, look at pension and closure obligations. They pass to the buyer, and they can be larger than the value of the plant itself.
Red Flag Six: Raw Material and Energy Contracts (11:12–12:38)
The sixth red flag is in the contracts that keep the plant supplied.
A mill's cost position often depends on a handful of agreements: the power contract, the scrap or iron ore supply, perhaps gas or oxygen. Some of those agreements exist only because the seller is part of a larger group. A sister company supplies the scrap. A group-wide deal sets the power price. When the mill changes hands, those arrangements can disappear, or be repriced overnight.
Check expiry dates. A power contract that runs out six months after completion can turn a profitable electric arc furnace into a loss-maker. Check for take-or-pay clauses, which commit the buyer to paying for volumes whether the plant needs them or not. And for scrap-based mills, check the catchment. As we discussed in episode one, scrap is a local market, and competition for it is rising.
The test: list every major supply contract, its expiry date, and what happens to it on a change of ownership. Then price the plant as if each one were renegotiated at today's market rates.
Beyond the Six Flags (12:38–13:50)
These six flags cover some of the key risks. They are not the only ones. Transfer pricing can be just as damaging: if the mill buys from or sells to its own group, its reported profit may tell you more about group accounting than about the plant. Labour relations matter too. Manning levels, working practices and employment guarantees given in the past all pass to the new owner. And sometimes the numbers simply do not reconcile. A steel plant obeys the laws of physics. Scrap in, power used, steel out and steel sold should all add up. When they do not, you need forensic specialists, and you need them before you sign.
No single adviser covers all of this. The answer is a due diligence team with a proven track record in steel: people who have walked plants, not just read data rooms.
Conclusion (13:50–15:16)
Six red flags, and more beyond them. Capacity that was never demonstrated. Maintenance that was never done. Costs that were never achieved. Sales that barely pay. Liabilities piled up over decades. And contracts that may not survive the sale.
Notice what they have in common. None of them is hidden. Every one can be found by someone who asks the right question and refuses to accept the first answer.
So, three things.
First: never buy the data room. Buy the plant. Walk it. Look at the slag heap, the maintenance backlog, the furnace lining.
Second: follow the tonnes to the customer. If a trader stands between the mill and the market, ask who is really making the money, and who really knows what the customer wants next.
Third: test every number against the outside world, not against the seller's best month.
The seller sets the asking price. What you didn't find sets the real one.
Thank you for listening. This is Dr Andrzej Kotas for Steelonthenet dot com.
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