ArcelorMittal sees major capex risk in Essar Steel acquisition

ArcelorMittal, the world’s largest steel company, sees excess capital commitments and timely execution of its resolution plan as major risks in acquiring Essar Steel.

ArcelorMittal, along with Japan’s Nippon Steel and Sumitomo Metal Corporation, has emerged as the frontrunner to acquire the stressed company.

Listing the difficulties in achieving the commercial objectives of the resolution plan, ArcelorMittal, in its latest annual report, said the risks involved in turning Essar Steel around are compounded to an extent by the fact that the company is emerging from bankruptcy with deferred maintenance capital expenditure.

Excessive capex

There are also risks associated with capital expenditure in excess of budgeted amounts, it added.

Essar Steel will be operated by a joint venture with attendant risks around strategic alignment, potential discord and deadlock, said ArcelorMittal.

While the deal is expected to be financed jointly, the exact ratio has not yet been determined and the nature of the long-term debt financing of the joint venture has not yet been defined, including what amount will be guaranteed by ArcelorMittal and Nippon Steel, it added.

On the operational front, the industrial project to turn Essar Steel around and improve its operational profitability is large scale and ambitious, the report said.

Essar Steel’s assets do not include certain assets that are ancillary to the steel plant, such as a slurry pipeline, power plants and port facilities. ArcelorMittal and Nippon Steel are visiting some of these facilities to understand the supply arrangements for raw materials and power for the steel mill, said the annual report.

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