Isn't ArcelorMittal more sinned against than actually sinning?

What has steel got to do with literature or publishing? Nothing, unless one is to recall Ayn Rand visiting Kaiser steel plant in preparation for her magnum opus Atlas Shrugged. Or consider the chief executive officer of HarperCollins, Victoria Barnsley, saying, "There is one disadvantage to being the largest company at a time of transition. That you have a lot invested in a status quo... Often in moments of business disruption, people who are leading the race aren't the ones who win it because they have so much invested in things remaining the same." The context of her saying this to a contemporary is the post-merger challenges to be faced by Random House and Penguin. But the observation has relevance for the steel sector, too, as the experience of ArcelorMittal and Tata Steel Europe will bear it out.

A quick recapitulation. Lakshmi Mittal waged a five-month corporate battle of epic proportions in 2006 to acquire Arcelor, which then stood as a symbol of pan-European cooperation involving Luxembourg, Belgium, France and Spain, to create an entity which then came to own 10 per cent of global steel capacity. Perhaps inspired by the Mittal logic of owning large capacity through inorganic route, Ratan Tata soon thereafter orchestrated the takeover of Anglo-Dutch Corus. Tata Steel stitched the Corus deal after a dramatic shootout with CSN of Brazil in January 2007. Both groups saw many virtues in consolidation in an industry where capacity still remains widely fragmented, including in China. The Mittal mantra came to be known well ahead of his acquiring Arcelor in buccaneer fashion is that in case some groups would take the lead in consolidating large chunks of capacity across continents then steelmakers would be less prone to wild price fluctuations. At the same time, consolidated steel groups would stand a better chance of negotiating prices of iron ore and metallurgical coal from a position of strength. After all, unlike steel, the mining sector is dominated by a few groups like BHP Billiton, Rio Tinto, Vale and Xstrata and they have flexed their muscles forcing the steel industry into accepting short-term contracts from the earlier yearly ones.

Earlier to its getting merged with Mittal Steel, Arcelor happened in 2002 through the merger of Arbed of Luxembourg, Aceralia of Spain and Usinor of France. Similarly, British Steel and Dutch Hoogovens joined hands to form Corus in 1999. Mittal showed a rare kind of stamina and courage as he fended off a chorus of protests from European vested interests questioning "his grammar, his Indian origins and the quality of steel his company makes" and overcame the stubbornness of Arcelor management then led by an imperious Guy Dolle. The capacity that he acquired so aggressively has now forced Mittal to run a knife through some of his high-cost operations in France, Belgium, Spain and Luxembourg as part of asset optimisation programme. In one respect Mittal might have come full circle in Europe, for like in 2006, he is once again pilloried by European politicians. In the first case, they displayed an illiberal, protectionist mindset. Now, their fulminations betraying nervousness are because of rapid decline of European steel industry. Mittal excising capacity selectively and also laying a few facilities idle are the cause of politicians' fury.

  However painful it may be for European areas where the axe has fallen, ArcelorMittal was left with no alternatives to what it did. Now that chief financial officer Aditya Mittal said he was not expecting any further "restructuring in Europe," union criticism should abate. No doubt, steel market behaviour in China and Europe, in the latter demand falling a further 8.8 per cent in 2012 making a total of 30 per cent erosion since 2007, hit ArcelorMittal hard. To make matters worse, global steel overcapacity led to price falls of 8-10 per cent depending on products and markets. A net loss of $3.7 billion, of course, after providing for mostly Europe oriented write-downs of $5 billion and economic challenges continuing through 2013, thanks to fragility in Europe, led the company, according to Chairman Mittal, to "concentrating our operational footprint on more competitive assets and reducing net debts." At 2012 end, ArcelorMittal had net debts $22 billion to be brought down to $17 billion by June. Last year's resu
lts were disappointing. The company's debt is downgraded to junk status. But ArcelorMittal still could raise $4 billion through offering of shares and convertible notes.

The woes of ArcelorMittal are not the least due to its making 45 per cent steel in Europe where supplies to automobile and home appliances industries caused an average loss of $143 a tonne. The company is not the only one to have done asset rationalisation. Tata Steel Europe and ThyssenKrupp have also closed unviable facilities. Voestalpine has plans to make sponge iron either in Canada or the US using low-cost shale gas, which then will be used as feedstock instead of pellets in its European plants. ArcelorMittal's problem is its big exposure in Europe where it alone accounts for nearly 100,000 of the region's 375,000 employment in the steel industry. This will explain why it is targeted for attack by unions and politicians. In all this, ArcelorMittal is more sinned against than actually sinning.