Events and Updates

Title: Slowdown in steel sector a damper for Arcelor Mittal as Essar Steel bill may go steep

Posted on: 19th August 2019

ArcelorMittal has bid Rs 42,000 crore but the final bill may be much higher, a big strain as steel prices slump globally


ArcelorMittal may all but have Essar Steel in its bag, but its challenges are not over yet. The global slump in the steel sector has raised concerns about the financial strain of multi-billion dollar acquisition, especially as the final price could be well over the bid of Rs 42,000 crore.


The world's largest steelmaker has also proposed additional capital infusion, and has already paid Rs 7,500 crore to clear debts of Uttam Galva Steels, a condition to clear the Clause 29A of the Insolvency & Bankruptcy Code (IBC). The clause bars promoters of defaulting companies from bidding for stressed assets. ArcelorMittal had invested in Uttam Galva Steels, and was seen as a promoter, thus requiring it to clear the dues to put in a bid for Essar Steel.


ArcelorMittal, who has joined hands with Japan’s Nippon Steel and Sumitomo Metal Corp for the Essar Steel acquisition, has offered Rs 42,000 crore, and will additionally infuse Rs 8,000 crore as capital. It may also have to spend another Rs 2,500 crore to gain control of the slurry pipeline, an integral link to transport raw material to Essar Steel's plant in Gujarat.


The final bill, after including additional working capital needs, could touch around Rs 62,000 crore. ArcelorMittal may have to shell out even more to acquire some of the power and port assets, close to the steel unit, that are at present controlled by Essar Group.


That hefty price could be strain for the steelmaker, which has already cut production at several of its units in Europe to adjust to the slowing demand. In the just concluded June quarter, ArcelorMittal reported a net loss of $447 million due to higher cost of raw materials and lower steel prices.


Financing worry


A silver lining for ArcelorMittal in the June quarter was the $1 billion reduction in its debt, which stands at $10.2 billion. And while there hasn't been much of a worry about financing its Essar Steel acquisition, industry observers fear the company will be under strain now, given the changing economic circumstances.


When ArcelorMittal joined the race for Essar Steel in late 2017, the steel industry globally enjoyed robust margins, backed by stable demand. But that has dramatically changed since the beginning of this year. In India too, steelmakers including Tata Steel and JSW Steel, saw their profits plummet in Q1 FY20.


To finance the Essar Steel acquisition, ArcelorMittal has entered into term agreements worth $7 billion, or about Rs 50,000 crore. ArcelorMittal and Sumitomo would each bring in $1 billion as equity.


The two partners may need to bring in some more. Essar Steel reported an operating profit of Rs 1,200 crore in the June quarter. But there are apprehensions if this will be enough to finance the interest cost, especially as the profitability will be under pressure in the coming months due to the further softening of prices.


After the June quarter result, ArcelorMittal Chairman and CEO LN Mittal remarked that overcapacity in the global steel industry remains a 'clear challenge'. He added that the company may need to again adjust its production levels in Europe due to increasing imports.


The delay in Essar Steel insolvency hasn't helped. The Supreme Court is now hearing on the dispute between operational and financial creditors of the company.