Falling steel prices may be a challenge for ArcelorMittal’s revival plan for Essar Steel

Suresh P Iyengar Mumbai | Updated on August 19, 2019

Essar Power’s Madhya Pradesh plant supplies electricity to Essar Steel. File Photo   -  PTI

Global demand expected to be subdued due to the ongoing US-China trade war

ArcelorMittal may face a tough challenge in reviving the fortunes of Essar Steel after paying a huge premium for the acquisition amidst falling steel prices and bleak outlook for the sector.

Also, global steel demand is expected to remain subdued with the ongoing trade war between the US and China and uncertainty over the US elections slated for next year.

In India, steel prices recently dipped below the ₹40,000 a tonne mark for first time in the last two years due to weak demand. Globally, steel prices have fallen 18 per cent to $490 a tonne from about $600 a tonne when ArcelorMittal first placed its bid for Essar Steel in early 2018.

Steel demand in India may revive, but will be constrained by the government’s ability to spend on infrastructure projects due to the weak financials and tapering tax collections.

In this scenario, ArcelorMittal’s aggressive bid submitted almost two years ago to pay ₹42,000 crore for the stressed Essar Steel and another ₹2,500 crore for the slurry pipeline in Odisha will be put to test. It has to pump in ₹15,000 crore more for reducing dependence on gas usage in iron making by migrating to blast furnace or Corex technology.

In addition, the world’s largest steel manufacturer has already paid ₹8,000 crore to clear the dues of Uttam Galva Steels to make itself eligible for the bidding process.

In all ArcelorMittal will be spending about ₹66,000 crore to put Essar Steel back on track, translating into investment of $11 billion which is equivalent to the overall Essar Steel debt.

“It is not yet clear when ArcelorMittal will be able complete the Essar Steel deal. Though the current situation is not conducive, I believe the company, with its able partner Nippon Steel and Sumitomo Metal, will have its own plan to tackle the situation,” said an analyst.

ArcelorMittal did not respond to a questionnaire sent by BusinessLine. The company in a statement to investors had said it expects to close the Essar Steel acquisition in the December quarter.

The company reported an operating loss of $0.2 billion and net loss of $0.4 billion in the June quarter.

EBITDA of $1.6 billion in the quarter was down 43 per cent reflecting a negative price-cost effect. Gross debt of the company was at $13.8 billion in June quarter, compared to $13.4 billion in the March quarter. As of June quarter, it had cash and cash equivalent of $3.7 billion.

Published on August 19, 2019

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