ArcelorMittal Faces No Good Options As It Scraps Recent French Deal
Last week ArcelorMittal (NYSE:MT) pulled out its bid for a EU-funded project aimed at manufacturing environmentally friendly steel at the Florange facility. This facility was at the center of the huge political row that shook the French government and the international business community recently. Despite ArcelorMittal claiming that only the first version of the plan had been ditched, tempers flared all over again. The company claimed that it could not pursue the plan at the moment due to technical difficulties but assured that it hadn’t abandoned it. This failed to satisfy worker unions and local politicians who reacted angrily, with metalworkers briefly occupying the contentious furnaces and workers at other two ArcelorMittal sites protesting to show solidarity with them. [1]
While the French President and Prime Minister have sought to assure aggrieved parties that they would make sure that all promises made by ArcelorMittal are kept, we doubt that these assurances are going to carry any weight. Ironically, the French government was the one to earlier charge ArcelorMittal with breaking promises made to France when the row first broke out. [2]
There are already renewed calls for the French government to take control of the issue again. While Prime Minister Jean-Marc Ayrault claimed that the central objective of not allowing worker layoffs had been achieved, it doesn’t answer questions about what these workers are actually going to be doing. Even if the project is pursued again in a future tender, in an optimistic scenario it could be years before it gets going on the ground.
Would ArcelorMittal be prepared to continue hemorrhaging money to keep the mothballed furnaces in working order for so long? We don’t think so. It suffered from an operating loss of $49 million last quarter and is struggling with a huge debt burden of $23 billion which has caused its investment rating to be downgraded by S&P and Moody’s. Unless the company can reduce its debt pile soon, its interest expense and cost of further borrowing could soar. [3]
The company is merely playing a waiting game in our view. It may want economic conditions in Europe to pick up before undertaking the ULCOS (Ultra-Low Carbon dioxide Steelmaking) investment. It is difficult to believe that ArcelorMittal had no idea about technical difficulties when it made an investment commitment to the project just a week before declaring non-viability.
See our full analysis for ArcelorMittal
Background
France had warned ArcelorMittal last month that it might nationalize the Florange facility if the company went ahead with its decision to shut down two blast furnaces at the site and sacked 630 workers. After a high-profile meeting between ArcelorMittal CEO Lakshmi Mittal and French President Francois Hollande, a compromise was worked out. ArcelorMittal agreed not to lay off workers and shut down blast furnaces at its Florange site. It also promised to make additional investments of $234 million at the site over the next five years. In exchange, the French government agreed not to nationalize the Florange plant. [4]
The new investment proposed was meant for production of high-end, environment-friendly steel under a European Union program called ULCOS that involves carbon capture and sequestration. ULCOS is a consortium of 48 European companies and other organizations working to develop ways to cut CO2 emissions from steel production.
The union workers at the Florange plant slammed the deal. They expressed a feeling of outrage and accused the Hollande government of betraying their interests. The workers demanded to know what had happened to a possible buyer for the entire Florange site mentioned by the industry minister Montebourg. The mayor of Florange Philippe Tarillon went to the extent of telling the media that not just workers, but he himself would have preferred to get rid of ArcelorMittal.
What Happens Now?
Sources at Prime Minister Jean-Marc Ayrault’s office have said before that the prospective buyer being talked about by the French industry minister was not a credible person. Hence it is unlikely that workers will press the government on this issue any further. Instead, we expect shriller calls for nationalization of Florange. This was an option Hollande had refused to take off the table even after the deal with ArcelorMittal, possibly to maintain leverage over the company. It could now come back to bite him. Worker unions and politicians will certainly demand to know what is keeping him from exercising this option, now that ArcelorMittal seems to have broken yet another promise. It is difficult for us to make political predictions but nationalization is certainly a possibility if Hollande’s cost-benefit calculus tells him that he should choose this option. ((ARCELORMITTAL : French unions rage at Hollande over Mittal deal, 4-traders.com))
At any rate, we don’t see an easy solution for dealing with the 630 workers in question. The company is already struggling with overcapacity in Europe, and the two blast furnaces are not likely to be started for years. ArcelorMittal had earlier promised to find alternative posts for these workers or give early retirement packages. Since the ULCOS project isn’t likely to happen for years now, the latter seems more likely. If and when ULCOS takes off, new workers can be hired again.
We have updated our price estimate for ArcelorMittal to $15 after the third quarter earnings results.
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