With the steel industry shrouded in gloom, Lakshmi Mittal is starting to consider options for what he might need to do to raise cash should “doomsday” scenarios for the sector turn to reality.
Should the slide in market conditions continue, the chairman and controlling shareholder in ArcelorMittal might need to raise several billion pounds by the end of the year to shore up the company's balance sheet and reduce the risks of a breach in banking covenants.
ArcelorMittal, the world's biggest steelmaker, said yesterday that it had no need to raise cash now and that it had a “successful debt-reduction programme in place” that was on course to bring down net debt of $26.5bn at the end of December by $4bn by the end of 2009.
But the company said it was continuing to “consider all [potential fundraising] options as is only prudent”.
A month ago, Mr Mittal said he thought the first quarter would probably mark “the bottom of the market” for the steel sector, with a small pick-up in demand later in the year.
But John Lichtenstein, head of the metals industry group at Accenture, the consulting company, said he thought the year-on-year drop in global steel demand in 2009 could be as much as 14 per cent, as against his projection at the end of last year that the fall would be 10 per cent.
A warning yesterday by Nucor, one of the two biggest US steelmakers, that it would probably make a loss in the first quarter, added to the sense of gloom.
Jeffrey Largey, an analyst at JP Morgan, and one of the most pessimistic industry observers, thinks demand for steel this year could fall by a fifth.
In a paper sent to clients last week, Mr Largey spelled out the implications of this kind of fall in demand for ArcelorMittal, of which Mr Mittal owns 45 per cent.
Not only would steel shipments fail to climb much from the depressed level of the first quarter, but prices would also stay low. Mr Mittal is relying on a pick-up in prices to boost operating profits.
Mr Largey's worst case scenario is that earnings before interest, tax, depreciation and amortisation would be $6.1bn for 2009, as against his most likely projection of $8.5bn. Last year's ebitda was $24.5bn. If earnings went this low, ArcelorMittal could be “at risk of breaching its financial covenant [over repayment of debts]” even assuming its debt reduction programme goes as planned, Mr Largey wrote.
One banker close to the company said: “All the signs are that Mr Mittal and his advisers are looking at the various options they could take to raise up to several billion dollars to bring down debts more than they plan at present, should conditions in the steel industry fail to improve.”
One potential option might be a rights issue that could raise between $3bn-$5bn. Another could be to sell at least one of the company's steel plants which might raise a similar sum, although it is highly unlikely to want to sell some of its crown jewels – such as its factory in Vitoria, Brazil.
Another alternative might be to sell a strategic stake in the company to an outside business, such as a Chinese state-owned steel company. ArcelorMittal yesterday strenuously denied it was contemplating such a step.
A deal of this sort, assuming Mr Mittal sold a stake of 5-10 per cent, could raise up to $2.5bn.
Beijing might find this a tantalising possibility, given China's wish to play a bigger part in the world steel industry. But it is highly unlikely that Mr Mittal would wish to entertain such a radical step.
But with the steel industry set to go through a slide that six months ago would have seemed impossible, there is an increasing sense that all bets are on.
