Contrary to expectations, a meeting between ArcelorMittal (NYSE:MT) CEO Lakshmi Mittal and the French President Francois Hollande has failed to resolve the row that erupted over French industry minister Arnaud Montebourg’s scathing comments on the company which wants to close down two blast furnaces at its Florange site. The two sides merely said that discussions would continue. The President’s office further added that Hollande was keen to make sure that no jobs are lost and presented various options to ensure the same. While no further light was shed on what those options were, we don’t think there could have been anything radical not already being speculated upon. The French side has refused to take the option of nationalization of Florange off the table. For a background on the row, you can read our previous article here.
While we initially assumed that the French government was merely indulging in rhetoric, it doesn’t seem to be the case now. For one, even if the government wanted to backtrack at this stage, it would only come at the cost of losing face. This is because its stand has garnered huge support across the political spectrum as well as from the French public. Popular support for the government in this case is a function of history as well as the French political culture. We cannot claim to be political experts and hence would direct readers to the following excellent pieces published in the New York Times (Labor Dispute Pits France Against ArcelorMittal) and Telegraph (Francois Hollande shows true colours with threat to nationalise ArcelorMittal) if they are interested in exploring this angle more.
Forget Politics, What’s The Financial Reality?
No matter what the political version may be, there is no denying the fact that ArcelorMittal is losing a lot of money in Europe. The Flat Carbon Europe division of the company suffered an operating loss of $66/tonne in Q3, contributing to a large extent towards an overall quarterly operating loss of $49 million for the company. The blast furnaces at Florange, if kept open and idle, would cost the company anywhere between $20-40 million annually. This represents a significant cost for a company operating in a market struggling with excess structural production capacity. It would also endanger an asset optimization program the company has put in place to generate $1 billion in savings annually. 
ArcelorMittal is struggling with a huge debt burden of $23 billion which has caused its investment rating to be downgraded by S&P and Moody’s. Unless the company can reduce its debt pile soon, its interest expense and cost of further borrowing could soar. 
What Are The Possible Scenarios And Solutions?
Let’s look at options for each side. ArcelorMittal cannot afford to keep the blast furnaces open, even in a mothballed state as they are now. It has an accountability to shareholders who would definitely already be unhappy over the suspension of dividend payments due to the mounting debt burden. The company also cannot allow the whole plant to be sold as its supply chain in France would be severely affected, putting the entire French business in jeopardy.
On the other hand, the French government has come too far to be able to retreat completely from its position. If it goes ahead with nationalization and it does lead to more job losses, it would lose political capital and suffer a huge blow to its reputation. A decision to nationalize itself will scare off potential investors and render useless its ongoing advertising campaign “Say Oui to France” which is meant to attract businesses to France. The campaign in running in the U.S., China, Canada, India and Brazil.
It is clear that a middle ground will have to be found. The government’s only problem seems to be job losses. If ArcelorMittal agrees to find jobs for these workers at other facilities in exchange for being able to shut down the blast furnaces, both sides could be satisfied. However, we doubt if this is a long term solution even assuming that the workers can be accommodated elsewhere. What happens tomorrow if the company wants to shut down more facilities in case the situation doesn’t improve in Europe? This would inevitably lead to more job losses. Having capitulated earlier, will ArcelorMittal have the appetite to fight the government? More importantly, will the government be able to change its previously successful stance?
Another option being suggested is to allow ArcelorMittal to go ahead in exchange for commitments to pump in more money for research and development to create jobs in future. The basic flaw with this seems to be that the French industry minister has built his whole case against ArcelorMittal on grounds of broken promises and commitments. Can the government politically sell another commitment from the company to the general public?
There are no easy solutions. Either one of the parties will have to blink or a short-term compromise will have to be agreed upon. With so much at stake, one can only hope that economic conditions in Europe improve so that the steel companies don’t need to shut down any more operations and be ensnared in politics.
We have a price estimate for ArcelorMittal of $15, which is close to the market price.Notes: