ArcelorMittal (NYSE:MT) concluded a deal with the French government last Friday in which the company agreed not to lay-off workers and shut down blast furnaces at its Florange site. It also promised to make additional investments of $234 million at the site over the next five years. In exchange, the French government agreed not to nationalize the Florange plant. 
To some, this agreement signals the end of the protracted row between the two sides which was often fought acrimoniously in the public domain. We beg to differ. Many terms in the agreement are unclear and hazy. ArcelorMittal has promised not to lay-off workers but it doesn’t intend to start the idled blast furnaces either. Where then would the workers be redeployed? Are they simply going to get paid without doing any work? No answers have been forthcoming.
The new investment proposed is meant for production of high-end, environment-friendly steel under a European Union program that involves carbon capture and sequestration. However, while the project exists on paper, the EU has not yet given financing commitments. So the investment may or may not materialize. What if it doesn’t? Would that count as another breach of promise by ArcelorMittal? More importantly, will it then be tenable for the company not to shut down the Florange blast furnaces for good? Will the jobs that have saved for now be lost eventually?
Nobody seems ready to answer these questions. Of course, they are all hypothetical in nature at this point but invoke real possibilities. Has anybody thought through them? We don’t think so. Therefore, the peace seems tenuous at best and the deal looks more like an attempt at face-saving for both sides. 
Before proceeding, in order to have a better idea of the background behind the high-profile row, we would advise readers to go through our previous articles on the issue here and here.
What Have Been The Reactions To The Deal?
The CFDT union workers at the Florange plant have slammed the deal. They have expressed a feeling of outrage and accused the Hollande government of betraying their interests. They demanded to know what had happened to a possible buyer mentioned by the industry minister Montebourg. Sources at Prime Minister Jean-Marc Ayrault’s office said that the buyer being talked about was not credible. It is difficult to believe that a sophisticated investor would have evinced interest, given ground realities. Demand for steel in Europe has slumped by 28% from peak levels seen in 2007, which has made blast furnaces in Florange uneconomical and any buyer would have to absorb huge losses even if he were allowed to buy the whole site.
The mayor of Florange Philippe Tarillon went to the extent of telling the media that not just workers, but he himself would have preferred to get rid of ArcelorMittal.
How Truthful Was The Industry Minister Being When Accusing ArcelorMittal?
Industry minister Mr. Montebourg, the man who caused the row to escalate with his public remarks, said that he felt let down. He has created problems for the government in the past as well with his stand over Peugeot’s proposed downsizing of its workforce. In the ArcelorMittal case, it seems that he is not on firm ground as far as facts are concerned. After Mr. Mittal took over Arcelor in 2006, Mittal Steel submitted an industrial plan to former President Mr. Jacques Chirac where it mentioned clearly that it would implement Arcelor’s restructuring plans in Europe. The company proposed to increase its competitiveness by closing down the upstream portion of flat carbon continental European plants which included blast furnaces at Florange, as well as those at Liege, which were closed earlier this year. The Florange blast furnaces were to be shut down in 2010.
However, in 2009 ArcelorMittal agreed to operate the blast furnaces and liquid steel operations at Florange beyond 2010 on the condition that long and medium term economic outlook be favorable. Keeping this is mind, it seems bit of a stretch for Mr. Montebourg to accuse the company of breaking promises and commitments to France, particularly when it showed leniency in not shutting down blast furnaces in 2010. 
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. 
We doubt that ArcelorMittal can afford to continue hemorrhaging money for a long time in Europe in view of its precarious financial position. The high-end steel production project seems like a convenient face-saver. If the project was already being planned for long, what was the need to consider shutting down blast furnaces in the first place? In our view, all that the two sides have managed to do is to kick the can down the road. What can be definitely said, according to economists and consultants, is that France has just made its task of attracting investors to the country much tougher. 
We have updated our price estimate for ArcelorMittal to $15 after the third quarter earnings results.Notes:
- ArcelorMittal Backs Off French Job Cuts, Prime Minister Says, Bloomberg [↩]
- France announces ArcelorMittal steelworks deal, Economic Times [↩]
- ArcelorMittal did not commit to keeping French plant open, Business Line [↩]
- ArcelorMittal Faces Quandary in French Call for Nationalization, WSJ [↩]
- ArcelorMittal’s Debt Plans Lead To Moody’s Downgrade, Trefis [↩]
- France Won’t Nationalize ArcelorMittal Steel Plant, WSJ [↩]