North America’s largest supplier of flat rolled steel, Cleveland-Cliffs (NYSE:CLF), saw its shares pop on Monday. CLF stock closed on Oct. 8 at $20.63, but ended Monday’s session at $21.46 for a 4% pop.

The catalyst? On Monday, the company announced it is acquiring Detroit-based Ferrous Processing and Trading Company (FPT). With this move, Cleveland-Cliffs is entering another area of the steel making business. It is now set to supply the industry (and its own production facilities) with both iron ore pellets and scrap metal.

Investors have had a lot to digest in terms of Cleveland-Cliffs in 2021. There are several big, conflicting issues to work through when considering adding this company to your portfolio.

On one hand, there’s the U.S. government’s planned infrastructure spending boom. That’s opportunity knocking for CLF stock. On the other hand, we have China slashing steel production and the resulting collapse of iron ore prices.

Does the FPT deal help to tip the scales back toward a pro-CLF stock view? The immediate market reaction certainly seems to indicate that is the case.

The Ferrous Processing and Trading Company Deal

On Oct. 11, Cleveland-Cliffs announced it will acquire FPT in a deal worth $775 million. The company operates 22 scrap metal processing facilities across the U.S., primarily in the Midwest.

FPT processes approximately 3 million tons of scrap per year, accounting for roughly 15% of the American prime scrap market. The press release also noted that privately-owned FPT generated $100 million in EBITDA in the trailing twelve months ended August 31, 2021.

Besides the additional revenue stream, Cleveland-Cliffs sees the acquisition as a winning part of its vertically-integrated strategy. The company already operates steel mills and produces its own iron ore. Now it will also be able to supply its own scrap.

The company elaborated further in the acquisition announcement:

“…Cleveland-Cliffs is the main source of the steel that generates prime scrap in manufacturing facilities. Furthermore, throughout our entire footprint, Cleveland-Cliffs also consumes a very significant amount of scrap in our EAFs and BOFs. The acquisition of FPT will enhance our ability to buy back prime scrap directly from our clients, cutting the middlemen and improving the margin contribution from scrap…”

How Important Is the Scrap Metal Market?

When looking at steel production, the raw material that most people think of is iron pellets. However, scrap steel is another critical component of the process. This is steel that is recycled (from old cars, for example) or left over as part of the steelmaking process.

According to the World Steel Association, the global steel industry uses 2 billion metric tons of iron ore as well as 575 million metric tons of steel scrap annually.

In addition, plants employing electric arc furnaces (EAF) run using up to 100% scrap steel. Cleveland-Cliffs operates four EAF facilities, and is planning to move its production further in that direction in the future.

The problem with scrap steel is that demand is rising while supply remains relatively static — there is only so much steel available to be recycled every year.  

EAF plants emit far less CO2 than traditional blast furnaces, so the move to EAF adds to Cleveland-Cliffs’ sustainability. The company points out that its acquisition of FPT also secures a “substantial” supply of prime scrap steel, avoiding the supply constraints that other steelmakers will face.

CLF Stock Has a Green Energy Angle

Speaking of sustainability, President Joe Biden’s administration is pushing a zero-emission agenda. Cleveland-Cliffs has already announced a plan to reduce greenhouse gas emissions by 25% by 2030.

As part of that move, the company recently opened a new Direct Reduction Plant in Ohio that’s designed for sustainable steelmaking.

In its FPT acquisition announcement, the company pointed out the fact that use of prime scrap steel helps to lower the carbon intensity of its steelmaking production.

While CLF stock is still down significantly from August levels, it is currently up 44% since the start of the year. While concerns remain — notably the tanking of iron ore prices — the acquisition of FPT added another factor in the “pro” column for a CLF stock investment. 

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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