Background
ArcelorMittal is the descendant to Mittal Steel, a business originally founded in 1976 by Lakshmi N Mittal. ArcelorMittal was created through the merger of Arcelor and Mittal in 2006, making it the world’s largest steel producer, with annual crude steel production of 98.1 million tons. In 2007 the newly merged company launched an expansive growth strategy, with 35 transactions worldwide. Arcelor Mittal has put substantial emphasis on growing its mining business in the past few years. 
Update
The current economic environment is forcing ArcelorMittal to cut around 450 jobs in Liberia and lower iron ore exports from the West African nations as it struggles to reduce costs. Interest expenses eat up a large portion of profits and the company has posted a net loss every year since 2011. While its net debt has declined several years in a row, the Financial Review explains that Arcelor Mittal needs to do more to cut debt. The company believes it did enough three years ago, issuing more equity while shutting down furnaces, but falling steel demand continued to hurt them. Moreover, the slowdown in China is also affected steel demand in that country as well as weak construction activity in Europe is another concern.
Moody’s ratings agency recently downgraded the company a notch from Ba1 to Ba. Moody’s vice president, Hubert Allemani, said the downgrade of the company “primarily reflects its weaker operating performance since the beginning of 2015 as a result of falling steel prices.”
5 Comments
Along with the worries of falling iron ore prices, falling steel shipments, a reduction in iron ore production, I see the looming economic conditions in China as posing the greatest risk to ArcelorMittal’s business model. With China historically being the largest importer of steel, their current economic situation is resulting in a slowing of imports as a push is being made for exporting. This has to be a pressure on ArcelorMittal’s exports and the price of iron ore with a surplus of supply entering the market from China’s exports. It will also be interesting to watch the effects in the global steel trade that will come of the Federal Reserve’s push to raise interest rates and the ECB’s push to lower interest rates.
In addition to cutting jobs in South Africa, ArcelorMittal is also asking the government establish import and anti-dumping tariffs to offset the surplus of cheap steel, mostly coming from China. The Chief Executive of ArcelorMittal recently stated, “if we go, the industry goes.” Increased Chinese steel exports have led to multiple steel producers around the world calling for government protection from dumping.
http://in.reuters.com/article/arcelormittal-safrica-results-idINL8N1310JD20151106?type=companyNews
http://www.wsj.com/articles/why-chinese-steel-exports-are-stirring-protests-1426466068
To me this shows how inflexible an industry like steel can be. They have been working for years to change improve their financials, but with so much of the value of their companies held up in heavy capital it is very difficult to make up debt without cutting production. Since they’ve been cutting production they’ve only been able to cut debt by posting net losses over the years. While this is not a problem unique to the steel industry, it certainly does experience the effects worse than most.
Can you comment on where the majority of the “35 worldwide transactions” took place? Knowing how expensive steel is to ship and realizing that prices are collapsing, it seems like having mills in region will be hugely important for riding out this period of low demand.
For a firm ArcelorMittal’s size, 450 jobs is almost invisible – more a reflection of local market issues. But this down cycle in prices will certainly be painful. Time to look at their financials and see what the numbers say….
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