A major row has erupted over ArcelorMittal’s decision to shut down two blast furnaces at the Florange site and a French minister’s scathing attack on the company over the issue. Mr. Lakshmi Mittal, the Chairman and CEO of the company is expected to meet the French President Francois Hollande to find a way out of the ugly row which potentially threatens ArcelorMittal’s presence in France.
In a shock to ArcelorMittal (NYSE:MT) the French industry minister Arnaud Montebourg Monday charged ArcelorMittal with lying and blackmail and told it to leave France. The minister said that ArcelorMittal had broken its promises made to France during its hostile takeover of Arcelor. According to the minister, Mr. Mittal had offered explicit guarantees about Florange’s future in 2009 while ArcelorMittal denies that any binding commitments were made. 
We are not too worried about the latest row and see it more as a case of political brinkmanship for reasons we explain below. We think that France’s best interests are served by engaging in dialogue with industry and not confrontation. The French government has displayed its willingness to take the latter approach in another case earlier this year and we see no reason why it shouldn’t get repeated.
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What Is This All About?
ArcelorMittal announced in October its decision to shut down two blast furnaces resulting in 629 job losses but continue with other operations at the Florange site which employs 2000 workers. It gave the French government 60 days to find a new buyer for the furnaces. The deadline expires on December 1. On the other hand, Mr Montebourg wants the whole site put up for sale, arguing that he can find buyers only for the entire facility and claims that he already has two offers for the entire site. He has threatened to nationalize the whole Florange site if ArcelorMittal refuses.
ArcelorMittal has warned that a sale of the entire Florange site would endanger the jobs of all of its 20,000 French employees because the non-furnace activities at the Florange site are integral to the rest of its activities in France and Europe.
Why Is Politics Getting Mixed With Business?
The woes of the Florange workers served as an electoral plank in this year’s presidential elections in France which were won by Mr. Hollande by promising a pro-jobs approach. While campaigning, he had proposed an act which would force companies to seek buyers before closing down profitable plants.
The industry minister Mr Montebourg is well-known for championing protection of French local industry and attacking companies which are looking to eliminate jobs. He took a similar approach to Peugeot in July this year when it wanted to shut down a plant and cut 8,000 jobs. Later a report commissioned by him concluded that Peugeot had no choice but to go ahead with its plan. 
Lawyers have said that the act which Mr. Hollande plans to protect jobs would be difficult to enact under the French Constitution and EU laws. Even a seizure of the Florange site by the government is unlikely to be permissible under law.
Our view is that the present government was elected for its pro-jobs approach and thus cannot afford to cede ground to the opposition by turning a blind eye whenever such cases come up. It may feel compelled to engage in rhetoric at least for some time before eventually coming around to a more rational point of view.
We believe that at the end of the day if politicians end up destroying more jobs than necessary through their short-sighted approach, it will only make them more unpopular. As the Peugeot case shows, the present French government can be flexible in its approach. Hence, we think that after meeting ArcelorMittal’s top management and understanding the difficult times being faced by the steel industry amid challenging business conditions in Europe, a compromise will be found. Our guess is that ArcelorMittal will extend the deadline before it shuts down furnaces at least as a temporary measure before further negotiations take place with the government.
We have updated our price estimate for ArcelorMittal to $15 after the third quarter earnings results.Notes: