2014 OUTLOOK: Is ThyssenKrupp edging closer to steel exit?

Is ThyssenKrupp looking to abandon the steel sector? Analysts certainly think it might be, but see no signs of a swift exit.

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Last year was a busy year for German steel producer ThyssenKrupp.

The company went from a €2.7 billion ($3.6 billion) merger of its stainless division Inoxum with Outokumpu at the beginning of the year, to buying back part of the assets and selling its stake in the Finnish group by the end of it
On the other side of the Atlantic, ThyssenKrupp sold its plant in Calvert, Alabama, USA to ArcelorMittal and Nippon Steel & Sumitomo Metal Corp (NSSMC), but decided to maintain is 73.13% stake in loss-making slab mill CSA in Brazil. 

In its most recent earnings release, the group noted that only 30% of its sales come from its steel divisions, with the remaining 70% driven by its capital goods and service business, which include divisions such as its elevator and plant technology businesses.

Ahead of the company’s annual general meeting on Friday January 17, Steel First looks ahead of the biggest challenges facing the Essen-based group in 2014.

Cevian Capital 
The new year started with industrial investor Cevian Capital requesting a seat on ThyssenKrupp’s supervisory board.

Cevian’s move to increase its shareholding to 10.96% at the end of 2013, revived talk of ThyssenKrupp possibly selling off its loss-making steel assets at some point in the future.

The idea of a potential split was further supported by German construction group Bilfinger, which initiated a sale of parts of its business soon after appointing a Cevian representative to its board.

“In the long run, I think, Cevian Capital will force the company to spin off the cyclical steel division. The question is how long it will take,” said Marc Gabriel, analyst at German private investment bank Bankhaus Lampe Düsseldorf.

However, a potential sell off of the steel assets looks unlikely to happen in the near term as the company will need another capital increase, Lars Hettche, an analyst with equities firm Bankhaus Metzler in Frankfurt told Steel First.

“The best-case scenario for a split would be 2016 and, in my view, it will more likely be 2017 or 2018,” Hettche said.

Analysts even believe that even the key shareholder, the Alfried Krupp von Bohlen & Halbach Foundation (named after one of the founders of the company) would accept a divestment of the steel assets if it were to be financially beneficial.

“[The loyalty to steel ended] when [previous honorary chairman Berthold] Beitz died, he really held on to steel,” Hettche said.

“With the new chair of the board [Ursula Gather] it is different, I think that if [ThyssenKrupp ceo Heinrich] Hiesinger shows a good plan that shows that it is best for the group and the steel division to split up I think they will support that,” he added.

CSA, Terni
By holding on to its stake in CSA in Brazil and regaining Italian stainless flats plant Terni, ThyssenKrupp now faces the task of improving the balance sheet at not just one, but two loss-making assets.

“To make [Terni] profitable will be difficult, as this plant was already a restructuring case 10 years ago and it has not improved,” Gabriel said.

The buy-back of the Terni assets led to many wondering whether ThyssenKrupp would hold on to it, especially after previously committing to leaving the stainless steel sector behind.

However, analysts do not believe management will be in a hurry to put Terni back on the market in the current climate.

“I do think they will try to sell these assets in the next two years,” Hettche said.

“At the moment the assets are not for sale and there are no negotiations going on. Before they can sell the [Terni & CSN] assets, they first have to make sure they reach breakeven,” he added.

It was only in 2012 that the current management promised a better financial outlook for the German steel group, through a “performance orientation” strategy focusing on profit-making segments.

Developments at the end of last year now beg the question if this will still be the strategy in the coming year.

“At the beginning of December [2013] it seemed the focus had shifted. Management was still trying to talk about [the more profitable] elevators [segment], but internally the focus is now rather on [the remaining operation in] Brazil and Terni, “ Hettche said.

“In December, the management did not seem to have a masterplan what to do about these assets,” he added. 

When ThyssenKrupp ceo Hiesinger came along in November 2010, he was charged with turning around the company’s fortunes.

Although Hiesinger has failed to sell off the stainless steel sector for good, analysts do not believe now is the time for any big changes to the management of the company.

“If you talk to people now, it is clear that Hiesinger’s reputation has been damaged a little bit, people no longer think he is a magician [as they did at first],” Hettche said.

“[However,] I haven’t heard anyone say that they would support a change of management and I don’t believe there will be any changes,” he added.