ArcelorMittal Updates: S. African Government Favors Competitors, Selling Stake In Turkish Co.
The South African government has excluded ArcelorMittal (NYSE:MT) from its preferential list for recently announced infrastructure procurement policy. [1] The move has left the company with jitters as the government aggressively bids to reduce the dominance of ArcelorMittal, the world’s largest steel company, in the country.
The beleaguered company, however, may have a reason to smile if its plan to sell almost half of its stake in Turkey’s largest steel producer comes to fruition. [2] ArcelorMittal’s product portfolio spans across a variety of flat products such as sheets and plates as well as long products including bars and rods. It mainly competes with steel giants like Alcoa (NYSE:AA) and U.S. Steel (NYSE:X).
Our current price estimate for ArcelorMittal stands at $23, implying a premium of about 15% to the current market price.
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Showdown with the South African government could hurt business
For sometime, the South African government has been fuming over ArcelorMittal’s pricing policy and has sought various measures including bringing in competitors to cut ArcelorMittal’s clout in the domestic steel market. Now, it has gone one step ahead and refused to grant the company preferential status in its infrastructure procurement program.
Under the procurement program, the country’s Department of Trade and Industry may mandate use of locally produced materials for public procurement except for steel, a key input in the construction. All steel products will be considered as locally manufactured irrespective of their origin. The company, however, expects this move to hurt domestic steel industry leading to job losses.
If the government continues to build pressure with such tactics, the company may have to either go for further price cut or stand to lose market share, which could have a substantial impact on our price estimate. Recently, ArcelorMittal’s South African unit announced price cuts for flat steel products by 2 to 5%, effective March 1st.
To reduce stake in Turkish company
As part of its strategy to focus on core assets and reduce net debt, ArcelorMittal has mandated Goldman Sachs (NYSE:GS) to cut its stake in Erdemir, Turkey’s largest steel producer. The company will sell 134.3 million shares and will issue warrants with respect of another 134.3 million shares. Should all of the warrants be exercised, ArcelorMittal’s stake will come down to about 12.5% from current 25%. It could fetch ArecelorMittal approximately $600 million, which will help its level of net debt that stood at nearly $22 billion as of last quarter. The debt laden company is grappling with the slowdown in European aluminum demand and rising input cost.
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refusal to grant it preferential status in its infrastructure procurement programme.
- ArcelorMittal Barred From South African Plan, Business Day Says, Bloomberg, April 2 2012 [↩]
- ArcelorMittal Will Sell as Much as Half Erdemir Stake, Bloomberg, March 27 2012 [↩]