ArcelorMittal and its joint venture partner in Gallatin Steel Company, Gerdau Ameristeel, have announced that the two companies are selling their respective 50% interests in Gallatin to Nucor Corporation for a total cash consideration of $770 million. The transaction is expected to close by the end of 2014.
The sale of its interest in Gallatin is consistent with ArcelorMittal’s policy of selective divestment of non-core assets in order to pare down its debt.
Gallatin Steel Company
The Gallatin Steel Company operates a mini-mill located in Gallatin county, Kentucky, that produces flat-rolled steel. The plant has an annual production capacity of 1.8 million tons.ArcelorMittal’s total steel production capacity stands at around 119 million tons. With demand for steel still recovering, the company has adopted a policy of selectively selling off non-core assets in order to pare down its debt. The sale of its stake in Gallatin is a continuation of the same strategy.
Steel Demand and Prices
The principal consumers of steel products are the automotive, construction, appliance, machinery, equipment, infrastructure and transportation industries. The nature of business of these sectors is cyclical, with demand generally correlated with macroeconomic conditions. Thus, demand for steel products is generally correlated with macroeconomic fluctuations in the global economy.
Steel prices have fallen over the last few years, driven primarily by weak demand due to adverse macroeconomic conditions in the developed economies and an oversupply situation. This is indicated by trends in the London Metal Exchange Steel Billet Prices. Over the course of last year or so, steel prices have recovered somewhat, driven by an economic recovery in the developed economies, particularly in the manufacturing sector. The Manufacturing Purchasing Managers Index measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has consistently registered values of over 50 for all months in 2014 for the U.S. While it has faltered somewhat lately for the Eurozone, it has still remained above 50 for all months in 2014.
However, faster growth in steel demand in the developed economies will be offset by a slowdown in steel demand growth in China. As per World Steel Association estimates, Chinese steel demand is expected to rise only 3.1% in 2014, as compared to 6% in 2013. A slowdown in Chinese economic growth, particularly in investment and factory output, has tempered the demand for steel. A crackdown on pollution caused by factories by the Chinese government has added to the slowdown. Overall, the Chinese market is characterized by an oversupply of steel, as Chinese demand for steel is estimated to be 721 million tons in 2014, with Chinese steel capacity estimated to be 1 billion tons. Steel production stood at 779 million tons last year.
Overall, global steel demand is expected to rise 3.1% to 1.52 billion tons in 2014, down from 3.6% in 2013, primarily due to lower Chinese steel demand. With only moderate growth in steel demand expected, the company is focused on managing its debt.
Focus on Debt Reduction
Due to a high level of debt on ArcelorMittal’s balance sheet and the weak steel industry outlook, major rating agencies downgraded the company’s credit rating to below investment grade in 2012. This raised the cost of borrowing for the company.
The company has since then embarked upon a concerted effort to pare down its heavy debt burden. Net debt for the company stood at $17.4 billion on June 30, 2014, down from $21.8 billion on December 31, 2012. The decrease in net debt is primarily due to improvements in cash flow from operations and cash proceeds from divestments.
The company has set itself a medium term net debt target of $15 billion, though it has not specified an exact timeframe in terms of years. The divestment of its interest in Gallatin Steel is a continuation of its strategy of divesting non-core assets in order to reduce its debt burden. The company generated approximately $4.5 billion from asset sales from September 2011 to December 2013. In addition, the company sold its 78% stake in the European port handling and logistics company, ATIC Services S.A. to HES Beheer N.V. for an undisclosed amount, earlier on in the year.
The Road Ahead
The company reiterated its commitment to its medium term net debt target in its second quarter conference call. The company does not intend to ramp up growth capital expenditure or dividend payments until its net debt target is met. While operational improvements and improved cash flows will contribute towards the achievement of this target, there may be more sales of non-core assets by the company in the future.
Source: Forbes
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