Is Time Running Out for Lakshmi Mittal?

Standard & Poor’s thinks so. The agency has downgraded ArcelorMittal’s credit rating to just above “junk” status. How crushing debt, low cash flow, and labor discontent weigh on the Steel King.

© by Mark Reutter
Posted 6/8/09

We are nine months into the steepest slide of steel production in modern times and Lakshmi Mittal, chairman of ArcelorMittal, by far the largest steelmaker, has yet to come forward and explain how his actions contributed to the industry’s travails.

Rather than owning up to his reckless overbuying fueled by promiscuous bank loans, Mittal has responded to the crisis by characterizing steel’s slump as an outgrowth of a technical “destocking” problem, accompanied by predictions that recovery is around the proverbial corner. “I feel the worst is behind us,” he told BusinessWeek last month, a reprise of what he predicted six months earlier.

Finally, a respected financial authority is calling Mittal’s bluff. On Friday (June 5) Standard & Poor’s lowered its credit rating of ArcelorMittal to two notches above “junk” status. The agency also placed the company on watch for the possibility of a further downgrade. The reason: the company’s debt load detailed in The Debt Noose.

After describing the recent steps that ArcelorMittal has taken to shore up its finances, including reducing production and raising $2.3 billion of new equity, S&P noted bluntly: “These actions are, however, not sufficient in our view to fully mitigate the negative effects of the downturn.”

The recession has rudely exposed the Achilles heel of Mittal’s extraordinary rise to prominence – the enormous overhang of debt at his flagship company, much of it consisting of bank loans (known as credit facilities) issued by many of the same banks implicated in the subprime mortgage meltdown.

Net debt at ArcelorMittal grew by 1,506 percent between 2004 and 2008, as Mittal and his Wharton-School-educated son, Aditya, engineered a series of acquisitions that propelled the company to the top rung of the steel sector, with 300,000 employees in 60 countries.

Under the financial covenants to its lenders, ArcelorMittal must make one dollar of Ebitda (earnings before interest, taxes, depreciation and amortization) for every $3.50 of debt it carries. But in the first quarter of 2009, the company earned less than half of that amount and isn’t likely to gain any significant ground in the next two or three quarters, according to S&P. This comes on the heels of a 42 percent drop in fourth quarter 2008 profits. A year ago, Ebitda was five times higher.

S&P warned of a real possibility that ArcelorMittal may violate its financial covenants – something the company dismissed as unthinkable a few months ago. Such violation may result in penalties and difficulty in obtaining short-term credit for its worldwide supply chain.

Equally worrisome, according to S&P, ongoing operations lost nearly $15 million a day in the first three months of 2009. In the last two quarters, ArcelorMittal has posted an operating loss of $5.9 billion.

With additional losses looming for the second quarter ending June 30, Lakshmi Mittal is facing some unpleasant prospects that he has yet to acknowledge. These include (1) selling some assets (and shrinking capacity) to raise capital and staunch negative cash flow; (2) easing the unrest in his labor force as forced furloughs and short workweeks multiply; (3) answering to governments about why so many of his mills have halted or limited production; and (4) witnessing his status as a business superhero become tarnished with controversy and mistrust. 

In Europe, Mittal has become a poster child of public wrath directed at fat-cat businessmen and overleveraged bankers who are popularly credited with having caused the recession. His hostile takeover of Arcelor, a European “champion” company, is still resented by many, including some prominent politicians.

On May 12, about 1,000 steelworkers stormed ArcelorMittal’s headquarters in Luxembourg during the company’s annual meeting, setting off smoke bombs and breaking windows to protest forced layoffs and short time. Mittal and the board of directors conducted the annual luncheon and meeting on an upper floor as police fought with demonstrators and journalists were told to leave the smoke-filled ground floor and exit through a back door.

The European Metalworkers’ Union warned in a statement that tensions among workers were high because ArcelorMittal executives would not give details on when closed plants would restart. Mittal told stockholders that the lowest-cost plants would be opened first, but declined to say when or where. Many of the company’s more expensive plants are located in Europe and the U.S., where labor and raw material costs are higher.

A day later (May 13) the company announced the layoff of 1,000 workers at its Indiana Harbor facility outside of Chicago. The company is operating only four of its 19 U.S. blast furnaces and has shut (or is in the process of shutting) facilities at Cleveland; Hennepin, Ill.; Lackawanna, N.Y.; and Georgetown, S.C., leaving about 4,000 employees without work.

All four shuttered plants, along with the partly closed mill at Weirton, W.Va., are considered candidates for eventual sale.

The U.S. layoffs were followed on May 19 by the startling announcement that the Temirtau subsidiary in Kazakhstan, long considered ArcelorMittal’s “cash cow” because of its very cheap labor force, had lost $100 million in the first quarter of 2009. The company said “urgent measures” were needed to avoid curtailing or even halting production.

The announcement brought renewed pressure on Kazakh President Nursultan Nazarbeyev, whose longtime promotion of Mittal has caused dissatisfaction among the 46,000 employees at the steel and mining complex. The head of a trades union told Reuters that the mood among employees was sharply negative following the announcement. “At the moment they are silent, just depressed. They are waiting for further steps. But they see that workers are protesting in other countries.” Within days, however, the poorly paid steelworkers of Kazakhstan agreed to a three-month wage cut.

In yet another example of potential labor discord, the company announced last Wednesday (June 3) it would place a large portion of its Spanish workforce (up to 12,000 employees) on limited hours until the end of 2009 and may extend the furloughs for a full 12 months “depending on market conditions.” An agreement with the Spanish government would allow employees to keep 90 percent of their wages, which would be partly paid by the country’s unemployment service.

The hard, true core of ArcelorMittal’s current difficulties is that its owner’s appetite for acquisitions has never been matched by a zeal for promoting new technology or zeroing in on promising markets.

At heart, Lakshmi Mittal is an accountant who prefers to drill numbers across his computer screen rather than dream up products that would use steel. With research and development kept to a minimum compared to companies of equal size, ArcelorMittal is plodding and unadventurous.

Much of his company’s physical plant is unremarkable, and some of the equipment is obsolete. Not surprisingly, one of the first measures Mittal took when times got tough last fall was to slash capital expenditures by more than half.

As hot metal turns cold, it remains be to seen whether the Steel King possesses the vision to extract his company from the mess for which he bears significant responsibility.