ArcelorMittal Finally Admits Defeat

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After years of fruitless negotiations with other stainless steel producers, ArcelorMittal has decided to abandon attempts at a negotiated industry rationalization and has spun out their stainless division in a 1 for 20 rights issue to existing shareholders. In the words of a Bloomberg article, the industry, at least in Europe, has been beset with overcapacity and rising costs, producers have been losing money for years and ArcelorMittal’s decision follows that of competitor ThyssenKrupp AG, who abandoned plans for consolidation last year when it couldn’t get a favorable valuation.

As carbon steel mills return to profit, stainless mills are only just turning a corner. ArcelorMittal’s Inox stainless division, with plants in Belgium and Brazil, produced 1.59 million metric tons of steel in the first nine months of this year, resulting sales of $4.18 billion, or 6.8 percent of ArcelorMittal’s total revenue. The division reported a $219 million operating profit in the period. Last year, it posted a $172 million operating loss and lost $119 on every ton it produced. ThyssenKrupp’s stainless unit posted a 946 million euro ($1.2 billion) loss last year, the biggest among its divisions.

The problem for the stainless industry is its rising raw material costs cannot be passed on to consumers due to chronic over-capacity, which results in the mill firstly having to absorb cost increases and secondly unable to amortize its fixed costs over its full capacity. The market is ripe for consolidation, but if it cannot be done by negotiation it will have to be done by takeover and closure. One challenge is that of antitrust. According to a Reuters article, the largest global stainless producer Acerinox has an 11 percent market share in Europe versus 23 percent for Outokumpu. ThyssenKrupp, Germany’s biggest steelmaker, is also the biggest stainless steel player in Europe with 31 percent of the market, making it unlikely the company would be allowed to take on ArcelorMittal’s 22 percent. Acerinox looks the most likely, but they may struggle to find funding.

If not a European, then how about one of the rising stars of Asia? China’s mills, though a growing force in global steel production, are hardly household names, but China’s Taiyuan Iron & Steel Group Co. (said by Bloomberg to be the largest maker of stainless steel by 2009 output) is a possibility. Or Posco of South Korea, or maybe Taiwan’s Yieh United Steel Corp? In truth, though, who would want Inox? The “new company is valued at $2.8 billion but carries $1 billion of net debt. It is barely breaking even and operates in a market with far too much capacity. The probability is ArcelorMittal will have to nurse it along for a while longer before some form of consensus can be reached with European regulators, or shareholders will vote with their feet.

–Stuart Burns

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