By Stuart Burns
ThyssenKrupp’s (OTCPK:TYEKF) dream of creating an integrated steelmaking supply chain on two continents has officially come to an end as the firm announced the sale of its Calvert plant to a joint venture between ArcelorMittal (NYSE:MT) and Nippon Steel (OTCPK:NSSMY).
Thyssen had hoped the two operations, called Steel Americas, would boost margins and profits thanks to lower labor and energy costs in Brazil, combined with the higher-value end market in the U.S., according to the WSJ. Unfinished steel slabs were to be made at the $6.8 billion plant at CSA, a joint venture with Vale, in Brazil and shipped to the $5 billion finishing plant in Alabama, where they were processed into high-grade sheets for automakers in the southeastern region of the U.S., notably BMW AG and Daimler AG.
But the financial crisis threw a wrench into ThyssenKrupp’s plans. Brazil’s thriving economy pushed up wages and drove up the Brazilian currency, reducing the cost advantages of making steel there. Technical problems, design flaws and construction delays ballooned costs and plunged the venture, and ThyssenKrupp itself, into severe losses.
The firm was under intense pressure to sell the loss-making assets to survive. Losses at Steel Americas – the combined operation, a regulatory fine and restructuring costs – caused a third straight annual loss at ThyssenKrupp for the financial year through the end of September, though the loss narrowed to €1.5bn ($2bn) from €5bn ($6.8bn) a year earlier.
Its gearing – the ratio of its net debt to equity – deteriorated further to 200.6% at the end of September from 185.7% three months earlier, compared with only 34% at ArcelorMittal, the world’s biggest steelmaker, according to an article in the FT.
The $1.55bn sales price of the Calvert, Alabama, operation is a sharp discount to the $5bn it cost Thyssen to build the plant, and yet, in ArcelorMittal’s words it is the most advanced plant of its kind in the world, which after three years of operation has already established itself in terms of quality and a growing client base.
Winners and Losers?
The new owners seem to have come out the winners from this sale, but although the joint venture headed off competition from other U.S. steelmakers to clinch the deal, the outcome could have been worse for the U.S. market.
To be continued in Part Two.