Avast empire of steel controlled by billionaire Lakshmi Mittal is crumbling rapidly. ArcelorMittal SA, the company which blitzed its way to the top of the world’s steel industry by buying up stricken plants across the globe and turning them around, may well be the biggest victim of the global commodity crash that is fast acquiring the contours of a bloodbath.
The numbers are scary. Last week, the company announced a net loss of $7.9 billion for financial year 2015, which included $4.8 billion of impairments and $1.4 billion of exceptional charges (primarily related to the write-down of inventory). Once a market giant with a peak valuation of $140 billion in 2008, today it is an investors’ nightmare with its market cap down to $7 billion, less than a quarter of the price it paid to buy Arcelor in its celebrated acquisition in 2006. And there are headwinds ahead with scheduled debt maturities in excess of $5 billion over the next two years.
So, how did the world’s largest steel company dig itself into such a deep hole? The reasons are many, though China’s aggressive capacity creation over the past 10 years (the nation now accounts for nearly 50% of all global production of raw steel) leading eventually to a global supply glut with a concomitant fall in prices, seems to be the major cause. Combine that with some injudicious investments by ArcelorMittal and its diversification into upstream products, all of which were ironically its allies for close to 10 years as steel demand peaked.
Unfortunately, the steel cycle turned adverse and ArcelorMittal’s growth spree turned against it. To that, add other issues ranging from recalcitrant workforces in countries like Spain—where it has production facilities—to governments in Europe which can ill-afford more unemployment following the closure or temporary shuttering of a steel plant.
What hasn’t helped is the European Union’s inability to reach any consensus on a suitable anti-dumping duty on cheap imports from China, despite accounting for 57% of that country’s steel exports. Not surprisingly, Mittal has called for the swift implementation of trade defence instruments.
The company also suffered from having integrated operations with iron ore and coal mining as part of its upstream operations. The steep fall in iron ore prices from $140 per tonne just over two years ago to about $40 per tonne now forced it to take a non-cash impairment charge on its mining assets. As one of the top five producers of iron ore and metallurgical coal, the mining slump has been a double whammy for the company.
Livemint.com