ThyssenKrupp Retiring from Steelmaking

ThyssenKrupp Retiring from Steelmaking

The steel business has changed dramatically in the past 30 years.

Long gone are the giants of the US Steel business from 30 years ago, Bethlehem Steel, LTV, Rouge Steel, Geneva Steel and more.

When they closed, much of their equipment was disassembled and shipped to China, where it is still being used. However, China has also built new capacity well above the world requirements and the excess tonnage has caused prices to drop dramaticly.

As a result other mills have reduced capacity, and ThyssenKrupp is ready to pull the plug on steelmaking to concentrate on higher profit areas.

Here is the recap from the Wall Street Journal.

“FRANKFURT—The boss of Thyssenkrupp AG is finally on the brink of putting steel in the German company’s past—if he can sever ties with its European steel legacy.

The storied industrial firm, which traces its roots to the early 19th century, took a big step away from its once-core steel business when it unexpectedly announced late last month the sale of the last of its beleaguered steel assets in the Americas, a Brazilian plant. The deal, flagged by The Wall Street Journal in October, is the most concrete sign to date that Chief Executive Heinrich Hiesinger is driving forward the company’s transformation from staid steel giant into a lean capital-goods operation.

Investors are watching to see whether Mr. Hiesinger can deliver on the next part of his strategy: separating Thyssenkrupp’s European steel business. That unit has been squeezed by a protracted steel glut and inexpensive steel imports from China, amid continuing consolidation in the industry.

Mr. Hiesinger has said he wants to remake Thyssenkrupp around high-margin capital goods such as elevators, sophisticated car components and submarines. But his efforts to get rid of the Brazilian plant were long thwarted by challenging market conditions in that region.

The company plans to sell the plant to Ternium SA, a Luxembourg-based steel producer with a strong presence in Latin America, for €1.26 billion ($1.33 billion). The transaction would result in a €900 million write-down, but would also reduce the company’s roughly €3.5 billion in net debt by €1.5 billion.

“Folks in the market thought [the plant] would be an overhang and realize very little value,” said F. David Segal, a portfolio manager at Franklin Mutual Series, a Thyssenkrupp shareholder.

“The fact that they were able to get what appears to be good value earlier than anticipated allows all stakeholders to focus on the future of Thyssenkrupp when it’s out of the steel business,” Mr. Segal said.

European steelmakers have shed thousands of jobs and closed unprofitable plants in recent years. After hitting all-time lows in early 2016, steel prices have since started to rally, helped in part by moderating competition and plant closings, experts say.

“The steel industry is now a global industry and to [compete in] that you need size,” said Ben Orhan, a steel expert at IHS Markit Ltd.

Thyssenkrupp has been in talks with India’s Tata Steel Ltd. for roughly two years to form a European flat-steel-products joint venture that would allow the German firm to untangle steel from its capital-goods operations. But the potential deal has stalled in part over a dispute regarding pension obligations.

Mr. Orhan said a tie-up between Thyssenkrupp and Tata “makes perfect sense,” but the companies could lose their window of opportunity.

“The longer it sits, the less likely it becomes,” Mr. Orhan said.

A spokesperson for Tata said the company continues to be “engaged in constructive discussions” with Thyssenkrupp on a tie-up.

Mr. Hiesinger declined to comment for this article. Thyssenkrupp has said that consolidation in the European steel industry is necessary, and that it is in talks with Tata and others.

If Thyssenkrupp is ever going to be seen by investors as a lucrative capital-goods enterprise rather than a slow-growing steel dinosaur, it would have to secure a deal with Tata soon, according to investors.

Mr. Hiesinger would have to show he can “get that across the finish line,” said Franklin Mutual’s Mr. Segal.

A deal with Tata or a spinoff of the European steel business would likely mean the gap with peers “should close and the market should focus on Thyssenkrupp as a capital-goods company,” Mr. Segal said.

Thyssenkrupp posted total sales of €39.29 billion and net profit of €296 million in fiscal 2016. Its elevator business—the crown jewel of its capital-goods businesses—delivered a profit margin of 11%, compared with a margin of 5.7% at Steel Europe and a loss at Steel Americas.

“We are now more independent from fluctuations in the steel market,” Mr. Hiesinger said following the announcement of the Brazilian plant sale. After the deal, expected to close by October, Thyssenkrupp will generate roughly 75% of sales from capital goods, Mr. Hiesinger said.

Since Thyssenkrupp hired Mr. Hiesinger in 2011 following corruption scandals and years of stagnation, the Siemens AG veteran has steered the company back to a fragile profitability. One of his initial moves was to sell Thyssenkrupp’s troubled Alabama steel-rolling and coating plant for $1.55 billion to a consortium of ArcelorMittal SA and Nippon Steel Sumitomo Metal Corp., improving the balance sheet and shifting investment to capital goods.

The expected sale of the Brazil plant “sets the stage for a successful re-rating” of the company based on its capital-goods businesses, said Seth Rosenfeld, an analyst at Jefferies LLC.

But it is unclear whether investors will value Thyssenkrupp on par with profitable capital-goods firms such as German peer Siemens.

“One of the big problems of Thyssenkrupp is that it doesn’t generate any free cash flow, and the last quarter was again a huge disaster in terms of cash flow,” said Joerg Schneider, a portfolio manager at Thyssenkrupp shareholder Union Investment.

Free cash flow for the first quarter of fiscal 2017, ending Dec. 31, came in at a loss of €1.7 billion, which the company attributed to a temporary increase in net working capital. “And because of that I’m not willing to give them a multiple like a traditional capital-goods company,” Mr. Schneider said.”

WSJ Mar. 27, 2017,

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