Good news from ArcelorMittal (MT) is something that would be welcomed by investors. After a quick read, the company's recent announcement that it was making further closures at its Liege, Belgium steelworks sounded like good news. Before interest and taxes, the company's Liege operations resulted in €200 million of losses for the company in the first nine months of last year. But, after further reading the announcement, I'm wondering whether the closures will actually happen.
ArcelorMittal is the world's leading steel and mining company based on volume. The company is also the leading supplier of steel products for a number of industries including the automotive, construction, household appliance and packaging industries. The company operates in 60 countries and employs about 260,000 people. But, the global steel industry is fragmented, and ArcelorMittal accounts for only about 6% of global steel volume.
In recent months there hasn't been much of a reason for investors to consider buying ArcelorMittal's shares. The company's announcement of its intent to close some of its facilities at its Liege Belgium operations is potentially good news for ArcelorMittal, if the closures actually happen. But, I think it's unlikely that the Belgium government will allow the company to close the steel producing facilities.
I'm convinced that ArcelorMittal's CEO, Lakshmi Mittal never envisioned that he would face all the problems he is facing today when he started consolidating what for the most part were struggling steel mills starting in the early 2000s. He built ArcelorMittal into a steelmaking giant, and incurred huge debt in doing so.
Today, ArcelorMittal's problems include the loss of its investment grade credit rating, huge debt, and huge and ongoing financial losses. The company is also having to try to adjust to excess industry-wide steel production capacity in Europe.
The company lost $709 million in the third quarter of 2012. It will be interesting to see what the company's full year 2012 financial results will be when they're announced.
ArcelorMittal's shares closed Friday at $17.47. The company's market capitalization is over $27 billion. There is no current P/E in that the company is not profitable, but the company's forward P/E for the twelve months ending December 31st of this year is 20.55. With all its problems, I don't see how the company can turn its operations around so quickly to justify that P/E by year-end.
ArcelorMittal plans to raise $3.5 billion by selling new shares and convertible notes, as part of an overall strategy to cut its debt from $23.2 billion at the end of September 2012, to around $17 billion by the end of this June. Perhaps to make the placement more attractive to investors, and to convince investors of the commitment of the Mittal family, which owns about 41% of ArcelorMittal's shares, the family intends to invest $600 million in the equity and debt offering.
ArcelorMittal's Announcement About its Plans at its Liege Belgium Steelmaking Facilities
On January 24th, ArcelorMittal announced that it intended to permanently close part of its huge steelmaking complex in Liege Belgium, citing structural over-capacity in Northern Europe. The workers' union has already called for the plant to be nationalized, indicating that the company had broken agreements with workers and that the company was also preparing "worse announcements."
The company's Liege operations are heavily dependent on the automobile industry. According to the European Automobile Manufacturers Association, auto sales in the European Union (EU) fell 8.2% last year, and are expected to continuing decreasing this year.
In October 2011 ArcelorMittal announced its intention to permanently idle the liquid phase of its Liege operations. The company then indicated its intent to concentrate on downstream activities, and operate five core lines and seven flexible lines. The company's intent for the flexible lines was based on adjusting its level of operations to market demand. The company's proposal for a flexible model was rejected by labor unions.
ArcelorMittal's January 24th announcement indicated that the economic outlook for Europe had further deteriorated and that demand for steel in Europe had decreased 8 to 9 percent in 2012, over 2011 levels. The company also indicated that the demand for steel in Europe is now 29% below the level prior to the global financial crisis of 2008. ArcelorMittal has 10 of its 25 European blast furnaces shut down.
Signifying the significant drag on the entire company that its European operations are having, the company indicated that it was taking a write-down of goodwill of around $4.2 billion for its European operations, and that the write-down would be incurred in the fourth quarter of last year.
But, if ArcelorMittal's difficulty in decreasing capacity in France is any indication of what its success will be in implementing its closure plan for Liege, the company may not succeed with its strategy.
ArcelorMittal wanted to close two French blast furnaces at Hayange-Florange in Loraine that were already idle, but wanted to continue to operate other facilities at the site. The French government threatened to take, what it said was temporary control, essentially nationalizing the plant to prevent the company from eliminating about 630 of a total of 2,700 jobs.
Frances's Industry Minister Arnaud Montebourg told the French Parliament on November 28th that the government had found a potential buyer for the facility, which ArcelorMittal did not want to sell. But it's questionable whether this buyer really existed, and whether any buyer could be found, given the overcapacity of steel manufacturing in Europe.
The confrontation between France and ArcelorMittal became personal. Montebourg said, "We don't want Mittal in France." ArcelorMittal gave in, and announced that it was restarting one of the blast furnaces. The company also agreed to find jobs for all of the 800 workers that were affected by blast furnace shutdowns.
If the response of the French government to potential closures is any indication, it's likely that the Belgium government will act similarly. If this occurs, Europe will continue to have a major negative impact on ArcelorMittal's global operations, financial results and credit rating.
A Quick Look at Prospects for the Global Steel Industry
Prospects this year for steelmakers in the United States and China are good, and the outlook for those with European operations is dismal.
China's economy will likely grow 8.4% this year, and the current consensus is that the U.S. economy will grow by only 1.5%. While the U.S. steel industry is generally doing well, bolstered by the strong performance of the U.S. automobile industry, the prospects for China's steelmakers are substantially better, primarily due to the Chinese economy growing at a greater rate than that of the U.S.
The economic prospects for Europe are another matter. EU growth for this year will likely be near zero, with some countries, notably Spain, facing a decrease in the size of their economies.
While there is a positive outlook for steelmakers with American and Chinese operations, the prospects for steelmakers with European operations are bleak. Since the global economic crisis of 2008 European steelmakers have been hard-hit by tough European economic conditions. These include major decreases in industrial production, as well as the auto industry and construction, all of which are major purchasers of steel.
Complicating the need by the industry to reduce steelmaking capacity in Europe have been government actions and threats of government actions. Particularly impacted by the need to reduce European steel production capacity has been ArcelorMittal . In reaction to decreasing steelmaking capacity in the EU, European political leaders are increasingly focused on political and labor considerations, especially with euro zone unemployment at the high level of 11.7%.
European governments will likely continue to pressure European steelmakers to keep steel production facilities open, and not downsize their European operations. Steel mills are big employers, and high levels of European unemployment will continue to affect European countries and governments. Threatened French government action has most recently impacted the French operations of ArcelorMittal. It's unlikely that ArcelorMittal will be able to proceed with its plans to close its Belgium facilities. But European governments are putting off the inevitable, the need to drastically shrink European steel production capacity.
While I'm not bullish on steelmakers with European operations, including ArcelorMittal and ThyssenKrupp (GM:TYEKY), I am bullish on steelmakers with operations in the United States and China. I've written here at Seeking Alpha about several U.S. and Chinese steelmakers that I believe are worthy of investor consideration. These include:
- U.S. steelmaker Nucor Corp. (NUE) which is profitable. The company's shares are trading at a P/E of 29.73. The company's shares closed Friday at $46.98, near the high close to the 52 week high of $47.13.
- Chinese steelmaker China Industrial Steel (OTCQB:CDNN). The company's shares are trading at a P/E of 4.51.
- Chinese steelmaker Sutor Technology Group (SUTR). The company's shares are trading at a P/E of 4.71.
- Chinese steelmaker China Gerui Advanced Materials Group (CHOP), which is profitable. The company's shares are trading at a P/E of 3.04.
When one looks at the P/Es of these four steelmakers, who are profitable, the comparison to ArcelorMittal is immediately evident, especially when you compare ArcelorMittal's forward P/E of 20.55 to these actual P/Es.
Investors should carefully evaluate the risk of investing in ArcelorMittal, since the company has lost its investment grade status and it is not likely to regain profitability any time soon.
The companies discussed above include smaller capitalization steelmakers with Chinese operations. But the Chinese companies, whose shares trade in the U.S. are all U.S. reporting issuers, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors. Investing in smaller-capitalization companies, as well as investing in companies in emerging markets, including China, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk