Overcapacity is an enormous problem for stainless steelmakers.
In flat products, capacity equivalent to 53% of the total market volume still stands idle, according to Steel and Metals Market Research (SMR).
In Europe, where overcapacity is easily more than 10 million tonnes, the problem is even greater.
So ArcelorMittal’s decision to spin-off its stainless steelmaking business is one small step in the right direction.
The world’s largest carbon steelmaker plans to float shares in the stainless unit in Europe and the USA early next year.
The shares will be listed on Euronext Paris, Amsterdam and Luxembourg, as well as traded on the over-the-counter marker in the US as NY registry shares.
Prior to the listing, existing ArcelorMittal shareholders will be given one share in the stainless unit for every 20 held in the existing business.
The move, announced last week after much anticipation, was welcomed.
“Stainless steel companies tend to trade at higher multiples,” said Credit Suisse analyst Subhra Kanti Das.
Hiving the business off as a separate unit will also help ArcelorMittal to reduce the volatility of the group’s overall earnings and enable it to concentrate on growing its mining business and its business in emerging markets.
The company looks like it has structured the deal well. The stainless unit will have around $1 billion of net debt after the spin-off.
And separating the two businesses will also enable the company to address some of the severe structural problems that plague stainless steel.
Stainless steel only accounts for 6-7% of ArcelorMittal’s overall revenues. That’s why, over the past few years, the business has fallen out of ArcelorMittal’s management focus.
As a standalone, the stainless steel unit will benefit from a dedicated management team, better equipped to restructure and rationalise the company for improved profitability.
Right now, that’s precisely what the company needs.
Europe is home to some of the world’s most advanced stainless steelmaking facilities. But over-investment in capacity and the painful contraction in demand that resulted from the financial crisis means these facilities are at risk.
Last week German steelmaker ThyssenKrupp agreed to relocate its Benrath rolling mill to Krefeld in an effort to save on costs and maintain competitiveness.
ArcelorMittal’s European stainless steel operations benefit from two state-of-the-art meltshops. Attractive assets.
“The problem is that their capacity is too high,” said SMR md Markus Moll.
Consolidation is the obvious answer. And the stainless spin-off certainly makes the business a much more attractive proposition for a merger or acquisition. At first glance, certainly.
But there is a lot of work to do first.
“There is a lot of restructuring to be done and someone has to burden the cost,” Crédit Agricole Chevreux analysts Alexander Haissl told MB. “You need to do your homework and only then think of consolidation.”
Jonathan Schroer, vp of European Steel and Metal at UniCredit Research, agreed.
“The merger story has been overplayed,” he said.
A combination with another stainless steelmaker does eventually make sense. For the time being, however, ArcelorMittal is concentrating on the task at hand.
“It is currently not our intention to merge the business with any other company,” a spokeswoman for the steelmaker said. “We are going for a separation and listing as we believe it is the right strategy for the business.”
