ArcelorMittal’s surprise $3bn cash call proves the steel industry is in dire straits. Amid plummeting global demand for commodities, the world’s largest steelmaker will issue new shares and a convertible bond. The new capital will arrive after a terrible first quarter left ArcelorMittal burning cash and stretched to meet its self-imposed targets to reduce its $26bn net debt pile.
The steelmaker will issue $2.5bn of common stock and a $500m convertible bond. It’s understood that the total could be increased to as much as $3.5bn, depending on demand.
And demand for the new shares and the convertible is strong. Both issues are understood to have been oversubscribed within 90 minutes of the announcement on Wednesday, according to a person familiar with the company. A price for each is expected by the end of the day.
That’s a good show for a share issue that wasn’t underwritten and in which the Mittal family is letting its control of the steelmaker slip. The Mittal's have agreed to subscribe to just 10% of the new shares, which will dilute the family’s current 45% stake to somewhere nearer 40%.
ArcelorMittal’s cash call may be a roaring success – but the industry looks worse than even a few months ago. Sales fell a staggering 32% in the first quarter and ArcelorMittal incurred a further $1.2bn charge mostly for inventory write-downs. After $850m of capital expenditure, the steelmaker’s free cash flow was a negative $521m.
Global steel demand will fall 15% this year, according to the World Steel Association. ArcelorMittal broadly agrees and has already cut steel production by half. It is expecting the second quarter will be more profitable as inventory destocking comes to an end.
ArcelorMittal still sees a healthy industry emerging from the crisis, with itself as the clear leader. Investors clearly share the enduring optimism. That looks reasonable. The steelmaker is doing what it takes to keep debt from growing. It issued a $1.2bn convertible only in March, and is now coming back for more. It should be well placed whenever the upswing comes.