Author Archives: Stuart Burns

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Reading like Tolstoy’s “War and Peace,” an epic article in The New York Times explores the background and history of Oleg Deripaska’s battle to initially gain acceptance in the West and, later, to save his companies — notably Rusal and its holding company En+ — from potentially bankrupting U.S. sanctions.

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What comes across strongly from the article, whether you necessarily feel The New York Times has a political point to make or not, is that acceptance in Western capitals and among the Western business elite can be bought via lobbyist and media firms.

Deripaska has spent tens of millions over the last few years trying to buy his way into a position where he is recognized as a respectable businessman and reputable member of the global business community. To its credit, Washington has been the standout obstacle to his campaign to gain visa-free travel and recognition.

While U.S. lobbyists, senators and businessmen have been paid millions on his behalf, successive administrations of both political hues have resisted the pressure to give him unfettered acceptance.

At heart, this is down to deep misgivings about how he came about his vast aluminum empire, his reported links to organized crime and his undoubted closeness to the current Putin administration.

While the details of Deripaska’s reportedly sordid past make interesting reading, into which The New York Times goes into considerable detail, of more interest to our readers is the likely fate of sanctions against Rusal and any minority shareholdings En+ holds in other downstream aluminum companies (which have been causing no end of problems this year, disrupting aluminum supplies and causing price volatility).

The upshot of The New York Times’ view is that the successful hiring of an army of lobbyists and repeated delays in applying the threatened sanctions points to the probability they will never be applied.

The current, several times postponed, end date is Dec. 12, but both the market and political observers are of the view this date too will pass without any sanctions being applied, despite the fact Deripaska has not sold down his shareholding in En+ or relinquished real control of his aluminum (and nickel) empire.

For aluminum consumers, that is good news — we don’t need to remind anyone of the price spike earlier this year that resulted from the initial announcement of the sanctions.

The aluminum price is currently languishing below the level it was prior to the sanctions announcement and subsequent price spike, suggesting the market is totally sanguine about any chance of sanctions actually being applied. The resulting disruption to the supply chain following the announcement of sanctions seems to have sent a reality check to Washington that has been heeded and every effort has been pursued to reach a compromise of saving face while also avoiding a repeat.

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The chances are “sufficient evidence” will be found that Deripaska has stepped back from day-to- day control to justify a shift of focus from En+ and Rusal as investment vehicles to Deripaska as an individual.

In a tight aluminum market, that’s just what consumers will be looking to hear.

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Criticism of Donald Trump’s tariff action, particularly by archrival Sen. Elizabeth Warren, is too often cast as simply political maneuvering, but there is a very real issue underpinning this current argument. That is, to be successful tariffs need to block imports and support domestic production — otherwise, what’s the point?

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Unfortunately, the consequences of tariffs are not that simple.

Some domestic mills will object to imports of certain products on the grounds that they manufacture the same product. But as my colleague Lisa Reisman pointed out so eloquently in a recent post last month, quality comparisons are analogous to the quality of your steak joint: they all serve meat, but what do you want a Peter Luger or Ponderosa?

CNBC reports Warren’s criticism of the tariff waiver program, citing research done by her staff, that foreign-headquartered companies received more than 80% of all exemption requests (of 909 decisions posted by the Commerce Department in the first 30 days after the tariffs were announced).

The majority of waivers — almost 52% — went to Japanese-owned companies, and overall 84% of their requests were approved, the article states. The implication being the waiver program is in crisis and exemptions are being granted in favor foreign firms, undermining the objectives of the tariff program.

By way of background perspective, CNBC reported that as of of Oct. 29, 43,634 steel and 5,667 aluminum exclusion requests have been filed. Overall, 15,662 steel exclusion decisions have been posted (and 11,281 were approved), while 905 aluminum decisions have been posted (and 763 approved).

Yet, as Reisman pointed out, not all grades are equal, even if they are nominally manufactured to the same standard.

Taking her example, grain-oriented electrical steel (GOES) manufactured by a Japanese mill is superior, you cannot fault consumers for applying for tariff exemptions if the domestic product is below global standards. Of course, GOES and Japanese material in particular, is arguably a unique example (it is hardly vanilla HRC).

From a quality perspective, it is easy to understand why Japan has more exemptions than other countries: they simply make grades and materials that are not produced elsewhere in the world.

So, the number of exemptions by country doesn’t tell a complete story. By comparison, Turkey is having a tougher time because their products are, to put it bluntly, lower on the food chain and there are undoubtedly many top-quality producers in the U.S. of comparable material.

What does require further investigation, though, is why firms based in the U.S. but with foreign headquarters — essentially, subsidiaries of overseas firms — should be more successful than domestic consumers in achieving waivers.

As this graph from the Financial Times shows, Japan and Thailand have been by far the most successful in achieving waivers.

While material from Japan and Thailand has been the most successful, imports from Turkey, Canada and Brazil have been among the least successful.

There have been 135 requests decided for tariff exclusions for imports from Turkey, 32 from Canada and 23 from Brazil. The administration has granted just one request for Turkey, none for Canada and none for Brazil, the Financial Times reports.

These figures in themselves, though, do not explain why foreign-owned subsidiaries have had greater success in achieving waivers than U.S.-owned businesses.

The Commerce Department accuses Warren of misunderstanding the process — it wouldn’t be the first time a politician misunderstood a piece of legislation — but you would hope she was receiving expert advice, so let’s assume she has it right. If that is the case, the Commerce Department has a case to answer, and an audit is apparently underway.

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If these tariffs are to achieve the desired effect and if they are to be worth the cost to American firms and consumers (Ford Motor said it expects the steel and aluminum tariffs to cut $1 billion from its profits by the end of next year), then waiver decisions cannot be made in an arbitrary manner. These decision should work to an overall strategy that furthers the president’s aims, rather than hinders them.

October was the worst since 2012 for world stocks, one that casts doubt on the decade-long bull market for equities, according to the Financial Times, and by extension the fate of metal prices.

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Although China’s CSI 300 closed up 1.4% this week, it was a bit of a dead cat bounce after a decline of 6% during the month, as this graph from Trading Economics shows:

Source: Trading Economics

The Chinese market has fallen from a peak of around 3,550 to 2,600 over the year. Most attribute the recent minor recovery to yet more promises of infrastructure investment made by Beijing.

But China is not alone seeing stock market volatility.

The Financial Times reports comments made by analysts from Capital Economics, who noted: “While upbeat earnings numbers have helped the US stock market find its feet again in the past couple of days, the bigger picture is that the S&P 500 has tumbled in recent weeks despite healthy earnings. We think that this reflects worries about the outlook for them, which in our view are likely to intensify as actual earnings growth slows sharply next year.”

Those fears seem to have abated for now on the back of stronger earnings results coming out both in the U.S. and Europe, and suggestions the Federal Reserve may not tighten quite so fast has taken the dollar off its highs.

The strong dollar has been depressing commodity prices this year, with a slight pullback this week taking it off a 16-month high hit on Wednesday, according to another Financial Times report.

Source: Financial Times

Despite strong fundamentals and producers facing considerable price pressure from rising alumina prices, aluminum has fallen along with other metals, in part due to the strong dollar.

On-warrant stocks of aluminum in LME-registered warehouses have fallen by 1,825 tons to 723,900 tons, but that only tells part of the tight supply market story.

The market deficit has been fed by off-warrant inventory finding its way back on the market. Off-warrant stocks held by the stock and finance trade have fallen from an estimated 10 million tons a few years ago to something closer to 3-4 million tons today. The very opacity of that market makes it very difficult to judge stock levels and, as a result, impossible to accurately estimate the true size of the aluminum market deficit if this supply source were not there.

What it does say is outside of China, aluminum’s medium-term fundamentals are strong. There are very few new smelters being built and limited return of idled capacity, even in the tariff-supported U.S.

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Short-term price movements, however, are rarely driven by long-term fundamentals; the dollar and stock market sentiment will continue to exert volatility on the whole metals sector.

Brazil’s Institute of Environment and Renewable Natural Resources, known as IBAMA, has lifted the embargo on Norsk Hydro’s Alunorte alumina refinery, several headlines are saying, encouraging many to think full production of alumina will start flowing from Hydro’s massive plant in the near future.

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But while it is correct that IBAMA has lifted an embargo, it is only IBAMA’s embargo that is so far lifted — an embargo placed on the bauxite residue deposit area (DRS2).

The decision to lift the embargo came after successful trials of Hydro’s press filter technology earlier this month, in which the firm successfully demonstrated its “state of the art” — in Hydro’s words — technology could process bauxite residues to a high enough standard to satisfy SEMA, the local environmental agency in the state of Pará, that the new treatment area DRS2 would be safe.

However, the embargo on DRS2 from the federal court system remains in place; a return to 100% of production capacity cannot be resumed until that court order is lifted.

So while we are all aware of the crippling impact the restrictions have had on output from Alunorte and the resulting volatility news and counter news is having on the alumina market (and by extension aluminum markets), what is less clear is when it will finally be resolved. It is only by understanding the cause that one can appreciate why it is taking time to achieve a solution.

The Court of Justice of Pará ordered Alunorte on Feb. 28 to reduce to 50% of production capacity at its alumina refinery, according to Norsk Hydro press releases, following concerns that the heavy rains led to leaks from the bauxite residue deposit containment ponds to the nearby river, causing contamination. The court also required Alunorte to suspend its operation of the bauxite solid residue deposit DRS2, and that a new operating license would be granted only when the integrity of the deposit was fully verified.

The decision to reduce output by 50%, rather than close it completely, was in part due to a determination made by the Secretary of State for Environment and Sustainability of Pará (SEMAS) that the Alunorte refinery could safely operate at 50% of capacity, but also recognition that with the Brazilian state and partner in the plant and nearby aluminum mill Albras were heavily reliant on Alunorte’s alumina, a full closure would have been catastrophic.

To read Norsk Hydro’s press releases, one would think we are talking of fresh water discharges from a leaky pipe or run-off from a coal shed roof, but the reality is more serious than that.

As a Norwegian site reported back in the spring, the series of discharges into the local river were unlicensed and, although the authorities were notified, the local population was not.

In addition to treated water, the toxic bauxite residue deposit known as “red mud” was also released during February of this year, risking the prospect that drinking water supplies downstream of the plant were polluted for several hundred families. Norsk Hydro would claim the releases happened at a time of heavy rains and were needed to release pressure on containment pools, which it must be said did not fail, as early reports suggested.

However, SEMA rightly questioned why, in an area with typically high seasonal rainfall, the pools were not designed to cope with such conditions. The releases were not accidents but the result of deliberate decisions. If the decision to ease pressure by releasing was taken then, so too could a warning to the local population not to drink the water until the pollution had passed and it was again safe.

To what extent the 50% restriction on Alunorte is a punishment and to what extent it is a precaution contingent on guarantees new measures are in place prior to a return to full capacity is unclear. There is a fair combination of economic necessity, environmental safeguards and no doubt politics in the mix.

At some stage, full production will resume — possibly by the end of this year, now that this new press refining technology has been approved.

Since Alunorte is such a key part of the alumina supply chain, aluminum mills’ margins have been under pressure as a result of the elevated alumina prices.

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At full capacity, the plant can produce some 6.4 million tons of alumina, or 10% of the world’s capacity outside China. Its impact on the alumina market has been likened to that U.S. sanctions on Rusal had on the aluminum market (another still unresolved source of potential volatility).

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Yes, yes, I know this has nothing to do with metal prices or trading fundamentals — but in my defense I will say it covers two of my passions (so just get over it, will you).

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ThomasNet occasionally puts out some great — if slightly quirky — reports, and this one from last week is in that form, covering the highly innovative watchmaker REC’s latest project to make a new range of watches from the wing skin of a World War II Spitfire. Nuts, maybe, but cool and rather clever (you can make your own judgement, but I will say it strikes a chord with me).

Firstly, REC hit on the neat idea of taking some kind of iconic piece of junk and turning it into a limited run of high-end watches.

That’s not totally unique, of course.

The Geneva watchmaker Romain Jerome SA took steel and coal from the Titanic and made them into a limited run of watches some 10 years ago, retailing between $7,800 and $173,100, according to Reuters.

REC’s first endeavor was much more accessible: a run of 250 watches made from the body of a rare 1966 Raven Black Mustang, costing “only” $1,500 each. Bravely, they asked clients what they would like to see next — the overwhelming choice was the British World War II fighter, the Spitfire.

REC located PT879, a MKIX, shot down in a dog fight over Russia in 1944. PT879 was one of something like a thousand Spitfires shipped to Russia under the terms of the Allied coalition against the Axis powers. The MKIX was the second-most popular variant of the highly successful Spitfire of which in total over 20,000 were made from just before World War II (in 1938) to a little after the war (in 1948), but of which less than 100 still fly today.

The Spitfire was remarkable in many ways.

Apart from being arguably the most beautiful aircraft ever produced, it was also highly effective, with a fast rate of climb, tight turning radius and an airframe that could be developed to perform and carry much more than it was originally designed to do.

In test pilot trials, one even set an airspeed record of Mach 0.92 (620 mph) — even though the resulting damage nearly ripped the wings off, it remains a remarkable story in its own right.

Part of the Spitfire’s novelty was the all-metal monocoque construction, in which the aircraft surface became a part of the airframe. Prior to World War II, most aircraft were designed around a wooden frame covered with a doped fabric skin, more akin to a World War I biplane.

The beautifully elliptical aircraft wings of the Spitfire were designed to reduce drag, but also gave the aircraft a beautiful and iconic shape that begged celebration in a personalized item, like a watch. The wing skin was made from a 2000 series aluminum-copper alloy and each dial will contain a piece of the wing skin, each carrying the unique service scars imparted during its brief life.

If it flicks your switch, a little piece of aviation history can be yours for around $1,300. If a Spitfire is not your thing, hang in there — REC will likely have some equally goofy, if no less alluring, idea in due course.

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A health warning: no spitfires were destroyed or otherwise damaged in the making of this article, or these watches. PT879 is being painstakingly renovated with modern hairline crack free aluminum wings and may yet bless our skies when it rises, phoenix-like, from the ashes of the scrap yard.

The ripples continue to spread across the pond of international trade from President Trump’s steel and aluminum tariffs.

In a recent post from India reported in Aluminium Insider, an analysis of the scrap, primary and downstream semi-finished metals trades into and out of India reveal how economies on the other side of the globe are grappling to contain the fallout of U.S. sanctions.

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India is becoming a growing force in the global aluminum market. With domestic bauxite reserves, relatively low cost (if environmentally polluting) coal-fired power and a huge domestic market, it should come as no surprise the country has invested heavily in aluminum production.

Naturally, that investment, much of it led by the private sector, is patchy and not fully integrated. The country imports significant quantities of scrap for its growing die casting industry, in large part because, as a newcomer to aluminum consumption, domestic arisings are far too low to meet demand.

The article states India’s overall scrap imports have risen 24% year-on-year, so far fueled by cheap U.S. exports looking for a home after China raised import tariffs. Domestic primary producers are complaining because die casters and billet casters are therefore incentivized to use more scrap than primary metal.

Primary producers are facing competition not just from scrap, the article explains. India is facing increased imports of wire rods and aluminum alloy ingots from the Association of South East Asian Nations (ASEAN) region. India signed free trade agreements (FTAs) with the countries comprising the ASEAN at a time when market dynamics allowed Indian producers to compete more effectively.

Now, with duty-free trade and a distorted regional market awash with product, India has become a target for excess supply.

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Readers in North America can be excused for puzzling why Europeans worry overly about the so-called “Eurozone crisis.”

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They seem to come around periodically. There is a great deal of noise and some volatility in the stock markets, but eventually — whether it is Greece, Spain, Portugal, Ireland, or a combination of several economies — the E.U. seems to have muddled through such crises over the last decade.

Even Brexit is confining its impact to the U.K. economy and has largely left the rest of the E.U. unaffected. But Italy’s latest budget proposals hold the potential for serious disruption, not least because it is the Eurozone’s third-largest economy and a founding member of the trade agreement started in the years after World War II — so its impact is proportionately significant.

So, what is the problem this time, you may ask?

Well, Europe has been slow to recover from the financial crisis of 2008. Debt ballooned in many countries and under the constraints of a fixed currency managed to the advantage of rich northern states like Germany, balance of payments deteriorated as the north imposed austerity on the south (or so many southern states saw it).

The rights or wrongs of the Eurozone’s structure aside, countries like Italy have been constrained for the last decade by fiscal rules set in Brussels. The Italian economy has lagged behind the rest of Europe — unemployment is high and growth is low. As the graphs below courtesy of Stratfor illustrate, the populace has had enough.

Earlier this year, they even surprised themselves by voting in a populist coalition on a platform of radical reform and reflation. That is a policy that puts them at loggerheads with Brussels, which has demanded an Italian deficit reduction that should see the deficit grow by just 0.6%, down from an expected 1.6%, to be achieved by increased austerity measures.

Italy’s new government, a coalition of the Five Star Movement and the League, have presented Brussels with a budget that would see the deficit rise to 2.4% next year, three times higher than an E.U.-mandated target and which Barclay’s Bank is quoted as predicting in The Telegraph will likely exceed 3%, even without a global economic downturn next year.

Italian 10-year debt yields have surged as a result, up near 300 points, not quite at the 400 level seen in the crisis of 2011 but a record four-year high. So far they are only talking about the budget, but nothing has been implemented. After years of QE, banks are holding some €387 billion (U.S. $444 billion) of state debt.

As The Telegraph report observes, banks face mark-to-market losses as yields rise. This erodes their capital buffers, forcing them to curtail lending and further crimping growth. Or, they might have to sell some of their bonds, creating pressure for yields to rise higher.

Either action can quickly turn into a self-feeding “doom-loop,” the paper suggests, as the banks and the sovereign state take each other down.

There is not going to be an Italian sovereign default. Although there are reports of capital flight to Switzerland, it is very unlikely there will be a run on Italian banks as there was in Greece.

However, Italy’s sheer size and core membership of the Euro means Brussels and Rome cannot allow the current standoff to escalate out of control.

Like a runaway super tanker, the situation cannot be easily contained like it was in Greece if the markets genuinely take fright.

You have to have some sympathy for Italy. State spending has always played a massive part in keeping a country together, where geography, history and culture constantly try to tear it apart, a report by Stratfor observed.

Reports of riots in Rome over the appalling state of public services underlines the popular will for public investment, regardless of austerity measures demanded by Brussels. So far, the government has a clear popular mandate to ignore Brussels and go for debt-fueled growth.

Brussels, likewise, is equally set against allowing Italy to buck the rules. The two are on a collision course and set against a backdrop of slowing global growth — outside of the U.S., at least — the economics are not in either party’s favor. Global growth or risk appetite are not going to mitigate the impact of an increasingly indebted Italian economy.

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The stage is set for a potential crisis.

We are not there yet, but in an increasingly nervous investment climate, it could prove a factor in a wider global stock market fall and global retrenchment.

It seems almost inconceivable that Credit Suisse could be downgrading expectations for the US steel sector, as recently reported by Reuters.

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It feels counterintuitive that an industry buttressed by 25% import tariffs would not be riding the crest of a wave, particularly when you read one firm has just settled with its union, agreeing a cumulative 14% wage increase over a four-year period.

Surely that sounds like a firm making bumper profits. Indeed, the same article states, the company in question, U.S. Steel, posted a near 60% increase in pre-tax profits in the June quarter.

President Trump’s trade policy, coupled with a strong economy, has sent domestic steel prices soaring, and finally released a number of high-profile investments in new capacity said to total more than $3.7 billion to be started by the end of this year.

Big River Steel LLC, Carpenter Technology Corporation, ArcelorMittal S.A. and Attala Steel Industries are all set to join U.S. Steel in new investments spurred by the opportunity created by the import tariffs.

Even if, as seems likely, some kind of deal is carved out for Canada and Mexico now the revised NAFTA agreement has been agreed (now called the United States-Mexico-Canada Agreement, or USMCA), removal of the 25% tariff among the three is unlikely to decimate prices, as tariffs remain in place with the rest of the world.

Market leader Nucor is by all accounts doing very well, having booked its highest quarterly profits in the company’s history at $683 million in the second quarter, more than doubled the $323 million total in the second quarter of 2017. Third-quarter earnings, which Nucor reported Thursday, hit $676.6 million, up from $254.9 million in Q3 2017.

U.S. Steel, on the other hand, remains the laggard of the industry, and the markets know that.

Despite record prices — admittedly, we have seen softening since the summer — the company’s stock has continued to underperform, having lost some 40% since March 1, according to CNBC.

But back to Credit Suisse and its industrywide downgrade: is their downgraded view valid?

Much is predicated on oversupply, particularly if deals are struck to remove the tariffs on Mexican and Canadian steel. Although China is often cited as the tariffs’ target, in reality China has not been a major supplier to the U.S. for some years due to early action.

Apart from slab out of Brazil, Canada, Mexico and Russia have been the largest suppliers. If tariffs are removed for these countries, supply will definitely increase and domestic mills may have to reduce margins to fight for demand, which is theirs for the taking this year.

The fact that steel prices have softened this quarter suggests mills are already responding to the new normal.

Prices remain elevated from pre-tariff days, but mills are having to respond to the global price — plus the 25% tariff — environment. Domestic capacity utilization is over 70% — better than, say, China’s, which is hovering in the high 60s — but still far from the 80% and above level mills would like.

You have to hope for U.S. Steel’s sake the tariffs remain in place, not just for months but for years and that the administration does not agree to too many carve-outs.

If the barriers start to leak like a failing dam due to tariffs being removed on USMCA-origin metal and saddled with higher costs incurred by wage deals struck now or investments made on the back of strong current domestic prices, those higher costs (such as inflated wage agreements and debt as a result of significant new capacity investments) may prove too much to support in a lower market price environment.

Under such a scenario, maybe Credit Suisse has a point.

Consumers, naturally enough, are hoping that tariff barriers are removed — and quickly. Our own take is they will be disappointed. So long as the Trump administration remains in power, so too will the majority of the tariffs (at least with the rest of the world outside USMCA).

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We may have hit peak steel in the summer and be facing a winter of softer prices. However, the bar has been raised on price competition and domestic mills are likely to enjoy some advantage from that state of affairs for some time to come.

Despite the turmoil of an escalating war of words and the prospect of a full-blown trade war, the price of iron ore has remained remarkably robust this year.

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As the primary ingredient in the most basic of manufacturing materials, steel, you may be forgiven for expecting demand would have been shaken by the prospects of tariff barriers stunting demand.

However, a number of data points support the picture of continued strong iron ore mine output and demand.

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A couple of weeks back, we covered ArcelorMittal’s takeover of Italy’s Ilva, Europe’s largest producer of flat-rolled carbon steel. We observed at the time that ArcelorMittal was one of a few firms capable of funding the cleanup and modernization of Italy’s polluting giant.

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But Ilva’s takeover comes at a price for ArcelorMittal. It’s more than just financial — this is strategic.

The European Union’s competition commission has ruled that their price for ArcelorMittal’s successful takeover of Ilva is the steel company must divest itself of four European steel plants to avoid an overly dominating position in the marketplace.

The firm that has negotiated preferred bidder status is our old friend Liberty House, owned by Sanjeev Gupta. We say “old friend” only in the sense we have written about Liberty House (or its parent company, GFG Alliance) on several occasions in the past, including when they picked up assets once owned by Tata Steel and, more recently, when they bid for Rio Tinto’s 280,000-ton-per-year aluminum smelter in Dunkerque, France.

GFG is becoming a major force in the production of both steel and aluminum in Europe, riding a wave of robust demand for both materials.

ArcelorMittal’s steel plants are all said to be profitable, comprising a major integrated works at Galati in Romania and Ostrava in the Czech Republic, along with rolling mills at Skopje in Macedonia and Piombino in Italy, with a total rolling capacity of some 8 million tons a year.

The acquisition will take Liberty to nearly 15 million tons per annum of capacity, encompassing a full range of finished steels that includes: plate, hot-rolled coil, cold-rolled coil, galvanized sheet, tin plate, bar, wire rod and rail. The plants already serve both domestic and wider European markets, including automotive, construction, industrial machinery, and the oil and gas sectors. These four plants will double Liberty’s capacity and push it into the big league of European producers.

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No price has officially been put on the deal yet, as negotiations are ongoing, but Gupta is fast positioning himself as yet another Indian-origin entrepreneur of significant ability — let’s hope he maintains his focus on the metals industry and doesn’t wander off the turf he knows best.