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Peabody Energy Corp
In 2006, Lakshmi Mittal became the King of Steel, though it wasn’t long before the crown grew heavy. Just two years after Mittal created the world’s largest steel company with his $41 billion takeover of Arcelor, the global financial crisis hit, dramatically curbing demand for the metal. Now, with operations concentrated in slow-growth Europe and the U.S., the future for his giant looks increasingly problematic. The latest sign of trouble: At the end of October, ArcelorMittal (MT) pulled out of a venture to buy Australia’s Macarthur Coal (MCC), leaving its partner in the takeover, Peabody Energy (BTU), to pursue the $5.1 billion deal on its own.
Buying all sorts of steel-related assets, including coal mines, was until recently part of Mittal’s strategy to build a globe-straddling steel company. And for a while the strategy was working. The Arcelor acquisition was to have been the achievement of Mittal’s career. The new company, combining Mittal’s proven ability to wring efficiencies from aging steelworks with Arcelor’s state-of-the-art European technology, seemed poised to profit handsomely from a booming world economy.
Three years of weak steel demand have put downward pressure on earnings and profits at ArcelorMittal, which is heavily indebted after years of dealmaking. The company also has to contend with a steel glut: Chinese mills have more than doubled production since 2005 to a projected 733 million metric tons this year, according to U.K. steel consultant MEPS. ArcelorMittal has trimmed back output some 20 percent from the 116 million metric tons it produced in 2007. Its share of the global market has fallen from 9.5 percent in 2006 to 6.4 percent in 2010, according to data compiled by Bloomberg.
The stock is down some 50 percent from its 52-week high in February. And Mittal’s 40.9 percent stake in the company is now worth about $12 billion, down from $55 billion in 2008. Says Rochus Brauneiser, an analyst at Frankfurt brokerage Kepler Capital Markets: “We’re in a very dark market environment right now.”
Mittal, 61, one of the globe’s most prolific dealmakers over the past three decades, seems ever the cool hand. Wearing a blue suit with no tie at his office on London’s tree-filled Berkeley Square, Mittal shrugs off any notion that the marriage with Luxembourg-based Arcelor has been anything less than a success. “There has been no surprise or disappointment in the merger,” he says. “It has been a very positive experience.”
ArcelorMittal is forecast to report a profit of $3.7 billion this year, the highest in three years. Still, that’s far less than the company’s $10.4 billion profit in 2007. Analysts wonder if that record can ever be reprised. “Those days may be gone forever,” says Tony Taccone, a co-founder of First River Consulting in Pittsburgh. “The only way we return is if the economies of all major countries and regions fire on all cylinders at the same time.”
Just about everyone, including Chief Financial Officer Aditya Mittal, agrees with that assessment. “Prices have moved down in the fourth quarter,” Mittal’s 35 year-old son told reporters on Nov. 3. “Customers are not keen to build inventories.”
An anemic economy is exposing the weak links in Mittal’s empire. The plants acquired through the merger with Arcelor are concentrated in Western Europe, where operating costs are high. To keep steel prices from collapsing, Mittal is putting some of those plants on ice. Rather than cutting production across the board, the goal is to keep the best facilities such as those at Ghent in Belgium and at Dunkirk in France running at near full capacity while closing less competitive mills, reducing costs by $1 billion.
In the last two months, ArcelorMittal has announced it is idling plants in France, Germany, Luxembourg, Poland, and Spain. On Oct. 14 the company said it would permanently shut down its blast furnaces in Liège, Belgium, which employs 581 workers. Employees responded by barricading six Arcelor managers in their offices for 24 hours. The company says it will try to find new jobs for them. “What is happening now is not a surprise,” says former Arcelor Chief Executive Officer Guy Dollé. “Continental Europe plants have no future.”
ArcelorMittal has also cut back production sharply in the U.S., which accounts for 24 percent of overall output and a slightly smaller share of sales. Mittal can’t count on demand from the so-called BRIC countries to offset weakness in Europe and North America. A planned $500 million plant expansion in Brazil has been put on hold, and progress on moving into India, Mittal says, “has not been what we expected.” Nor does he see an opportunity to expand in China, where the company has two joint ventures. Chinese producers, he warns, which make about half the world’s steel, can “export what they don’t sell [at home] at any price. They will always be a threat.”
For now the emphasis is on conserving cash and trimming debt. Mittal said he is even considering selling some $10 billion in noncore assets. Balking on the Macarthur Coal takeover is just more evidence that Mittal is hunkering down. He says the company shied away from the purchase when it became too expensive. Still, analysts see a shift in Mittal’s take-no-prisoners style of dealmaking. “They’ve always been acquirers of assets, and they’ve always held on,” says Anindya Mohinta, an analyst at Citigroup (C) in London.
Mittal insists his company is becoming stronger year by year, and he may be right. If the world economy does bounce back, Mittal will be better positioned than most to profit because he could quickly bring back idled capacity. “The direction is right,” he insists, “but it is being overshadowed by the bad economy.”