This time it’s different — or so ArcelorMittal would have us believe.
The rest of the steel industry has largely matched the Luxembourg-based steel giant’s steep 45% cut in production in the past few months. That may enable the world to avoid a steel glut, the cause of so much pain during previous recessions.
Even so, ArcelorMittal is leaving nothing to chance. Sensible action to reduce its debt load should enable it to ride out whatever lies in store this year.
If the industry does avoid the price collapses, losses, and bankruptcies of previous recessions, that would validate ArcelorMittal’s aggressive efforts to lead sector consolidation which has given it around 8% of 2008 global steel output. But $22 billion of acquisitions over three years have left the company with $26 billion of net debt — equivalent to nearly three times this year’s forecast Ebitda. With the company forecasting Ebitda of a mere $1 billion in the first quarter of 2009, that’s much too high to be comfortable.
ArcelorMittal is already making in-roads into this debt pile, unexpectedly managing to reduce it by $6 billion in the fourth quarter alone. Its target is to reduce debt by another $4 billion by the end of 2009. Cutting the 2009 dividend in half will save a further $1 billion. Shrinking working capital in line with production cuts plus several thousand extra voluntary redundancies will also help free up cash. The company has also been able to count on support from its banks, which have agreed to spread $4.8 billion of $8 billion in debt due in 2010 over three years.
That should leave ArcelorMittal in a strong position. As one of the industry’s most profitable companies per ton of steel produced, it is well geared for any upturn as. But equally if its forecasts of the cycle’s turn prove too optimistic, the steel maker looks better equipped than many rivals to cope with a longer-than-expected slump.
By Matthew Curtin
Wall Street Journal 2/11/09