December 4, 2021

DealBook: As European Acquisition Struggles, Tata Takes $1.6 Billion Write-Down

Tata Steel, India’s largest steel producer, said on Monday that it would take a $1.6 billion write-down, citing the “weaker macroeconomic and market environment in Europe.”

The trouble stems mainly from Tata’s acquisition of Corus.

Tata made an aggressive push into Europe, buying Corus for 6.2 billion pounds in 2007. But the deal, just before the onset of the financial crisis, was ill timed. Since the acquisition, demand for steel in Europe has fallen by about 30 percent, including about 8 percent in the company’s last fiscal year, which ended in March.

Tata’s European operations, which employed 33,000 people a year ago, are concentrated at IJmuiden in the Netherlands, South Wales and Northeast England. The company has announced restructurings in the past, including the loss of 900 jobs, mainly in Wales, last November.

The problems have taken their toll on earnings. Tata Steel, which is set to report earnings on May 23, said that it lost $78 million in Europe for the quarter ending Dec. 31, before accounting for interest, depreciation and taxes.

Jeff Largey, an analyst at Macquarie Securities in London, said that Tata’s European operations had “been quite challenged in terms of margins and costs.”

Tata is far from alone in struggling in Europe.

ArcelorMittal, the world’s largest steel company, has recently taken steps to close blast furnaces at Florange in France and Liege in Belgium. The company also wrote off $4.8 billion on its European operations in the fourth quarter of 2012.

Lakshmi N. Mittal, the chairman and chief executive of ArcelorMittal, suggested in an interview on Friday that he might also close steel plants in eastern Europe, where four of the company’s blast furnaces were idled. Mr. Mittal said the company was monitoring the environment to see whether further closures were warranted.

In his remarks to analysts, Mr. Mittal was cautiously upbeat on the outlook for steel, saying he expected demand to rise 2 percent to 3 percent this year. Other companies in the industry have been downbeat. Most have either reported disappointing results or warned about the future, according to Mr. Largey.

Like competitors, Tata’s issues go beyond Europe, as demand for steel slumps amid the global economic weakness. The parent company reported a $139 million loss for the last three months of 2012. In the announcement on Monday, Tata said that it was also taking impairment charges on operations in Thailand and South Africa.

Article source:

Green Column: In European Union, Emissions Trade Is Sputtering

The Union set up the E.T.S. in 2005 to send a clear signal to electric utilities and other polluters that over time they needed to switch to cleaner energy sources and adopt innovative anti-pollution technology. But current prices, the equivalent of less than $7 a ton, are too low to encourage much of anything.

“The European Union’s energy and climate policy is in disarray and risks losing credibility,” said Kash Burchett, an analyst at IHS, an energy consulting firm in London.

Some hope for shoring up the system came Tuesday, when the environmental committee of the European Parliament voted to allow the European Commission to reduce the number of permits it auctions in the next three years.

“This was a lifeline for the carbon market and for emissions trading as a policy tool for curbing emissions,” said Stig Schjoelset, head of carbon analysis at Reuters Point Carbon, a market research firm in Oslo.

Under the E.T.S., polluters like utilities and steel companies are allocated some carbon allowances. They buy more permits at auction if they need them. If, at the end of the year, they do not have enough permits to cover their emissions, they face heavy fines. The total number of permits is scheduled to tighten each year, and the proportion of credits that companies must pay for, rather than receive free, is also supposed to rise. The intended result of this system is that carbon will be progressively squeezed out of the economy.

But amid Europe’s economic malaise, many companies have chopped back production, leaving them with excess allowances. Demand for steel in Europe, for instance, is down about 30 percent since 2007, leaving steel makers like ArcelorMittal with allowances to sell. Last year, ArcelorMittal sold 21.8 million tons of its credits for $220 million. The company says it applied the receipts to energy-saving projects.

Low carbon prices do provide some relief to industry in grim economic times, but they do not provide much incentive to switch to cleaner fuels or invest in expensive technologies like carbon capture and storage, a process for removing CO2 from a plant’s emissions and pumping it underground.

In fact, current low carbon prices allow utilities to mothball power plants fired by natural gas, which is expensive in Europe, and instead burn coal, which is now cheap but produces far more pollution.

Mr. Schjoelset, of Reuters Point Carbon, figures that a carbon price of €30 to €40 per ton is needed to encourage utilities to switch from coal back to gas, while €60 to €150 per ton may be required to promote the adoption of carbon-capture technology.

“We need a higher carbon price today for a long-term fundamental shift toward greener production in Europe,” he says.

But industrialists and others warn that higher costs and uncertainty could further reduce the level of investment, which has already dropped in recent years, according to the European Union.

“We are not able to plan because we do not have a stable legal environment,” said Wolfgang Eder, chief executive of Voestalpine, an Austrian steel maker. “On the CO2 issue you have new intentions every year.”

Given industry’s desire for predictability in carbon policy, perhaps the most important lesson the Obama administration can learn from the Union’s experience is that a cap-and-trade system cannot be as volatile as Europe’s has been.

“You can see now one glaring issue we failed to address is to design a mechanism to adjust to external shock,” said Anthony Hobley, global head of the climate change practice at Norton Rose, an international law firm.

Against the sobering backdrop of a recession, a debate is beginning on the paths Europe has taken to reduce greenhouse gas emissions. Even Germany, which wrote blank checks to build Europe’s most aggressive renewable-energy program, is having second thoughts.

The country’s environment and energy ministers recently came to an agreement for reducing the ballooning costs of the renewable-energy program by close to €2 billion a year.

The trouble with subsidizing clean energy sources like wind and solar is that the cost rises as the programs become more successful. Renewables now account for almost one-quarter of German electricity generation, but they are also adding a similar amount to residential electric bills, according to energy consultants IHS.

In Britain, the government is conducting a very public debate with EDF, the utility controlled by the French government, over what price it will pay for electricity from a nuclear plant planned for Hinkley Point in southwest England. London had been counting on nuclear power to help it achieve its greenhouse gas reduction targets as well as meet rising power demands, but soaring cost estimates are putting that plan in doubt.

The government seems to hope that it will be let off the hook by a shale gas miracle like the one that has occurred in the United States. But Britain’s shale gas reserves are unproven, and the gas is controversial, after earth tremors set off by test drilling in 2011.

The adoption of a serious cap-and-trade program in the United States would be good news for Europe, Australia and any other government that wants to do something about climate change.

But without a global effort, the risk for Europe is that putting a high price on carbon and energy will just lead to a migration of industry and jobs to cheaper destinations.

Connie Hedegaard, the European commissioner for climate action, said in an interview that to blame environmental policies for job losses and economic malaise is “a false diagnosis.”

In fact, she said, the European renewables industry was one of the few areas where jobs had increased in the last few years.

The real challenges for European competitiveness, she said, were areas like wages and taxation levels. “It is important to get the diagnosis right in order to give the right medicine.”

Article source:

ArcelorMittal Rejects Europe’s Pressure on Job Cuts

The company, ArcelorMittal, has said no.

“Continuing to operate these plants would threaten the overall viability of our business in Europe,” said Nicola Davidson, a spokeswoman for the steel giant, which is based in Luxembourg.

“We are a public company,” Ms. Davidson said Wednesday. “We are responsible to our shareholders.”

And so go the politics and financial realities of steel in Europe, where, along with ArcelorMittal, the German company ThyssenKrupp and the British operations of Tata Steel have announced cutbacks adding up to thousands of European jobs.

“Without steel, there is no Europe,” the official, Antonio Tajani, a European commissioner for industry, said late Tuesday.

He was speaking in Brussels at a third and ostensibly final meeting of government ministers, company executives and union leaders that was aimed at trying to arrest the decline of the European steel business, which employs about 360,000 people. The group is to produce an action plan by summer aimed at reversing the decline in an industry in which Europe was once the world leader.

Mr. Tajani called for ArcelorMittal to delay plans to close plants in four countries and cut thousands of jobs, until the European Commission could present its action plan.

ArcelorMittal, though, said it would proceed on its own timetable.

That could set up a new battle between ArcelorMittal and European political authorities. Late last year the company had a showdown with the French government over ArcelorMittal’s plan to permanently close two idled blast furnaces at Florange, in eastern France. After the government threatened to nationalize the site, the confrontation ended inconclusively; the company promised to invest €180 million, or $242 million, in continuing businesses at Florange but said the blast furnaces would remain shut down.

Along with Florange, ArcelorMittal also plans to close two blast furnaces and other operations in Liège, Belgium, as well as other units in Spain and Luxembourg. At least 3,500 employees will be affected, according to the company, which says it has about 98,000 employees in Europe. The company says that most of the 900 or so people whose jobs have already vanished in Spain and Luxembourg were reassigned elsewhere and that it will try to follow the same practice in France and Belgium.

In a sense ArcelorMittal is turning into what some European leaders feared when its chairman and chief executive led a hostile takeover of the European champion, Arcelor, in 2006. With net debt of about $22 billion — almost equal to the company’s $28 billion stock-market value — Lakshmi Mittal, the chairman of ArcelorMittal, has little choice but to cut the least efficient units in his global business.

And he has little incentive to protect Europe, where his main steel business of supplying the home-appliance and auto industries lost an average of $143 per ton last year. Undersized plants like those at Liège and Florange, which are also far from seaports, are logical targets, analysts say.

But Mr. Mittal is starting to feel Europe’s political heat.

“Mittal has always used governments and unions against each other,” the French industry minister Arnaud Montebourg said in an interview published Wednesday in the newspaper Le Monde. “Here, he’s facing a unified front of the European Commission, the unions and member states.”

“If we let him shut Liège, he’ll continue elsewhere,” Mr. Arnaud added. ‘We didn’t stop him at Florange, maybe we can succeed at Liège.”

Mr. Montebourg and Jean-Claude Marcourt, industry minister for Wallonia, the largely French-speaking area of southern Belgium, say they have allies in Poland, Spain, Germany, Austria and the Netherlands.

Article source:

DealBook: Peabody and Arcelor Seek Control of Macarthur Coal

Macarthur Coal is back in play, more than a year after it rejected a takeover offer.

The company said on Monday that Peabody Energy and ArcelorMittal had offered to take a controlling stake in Macarthur for 15.50 Australian dollars a share, valuing the coal miner at 4.7 billion dollars ($5.1 billion).

In May 2010, Macarthur’s board rejected an offer from Peabody of 15 dollars a share, calling it too low.

This time Peabody, an American coal company based in St. Louis, is teaming up with one of Macarthur’s largest shareholders, the steel maker ArcelorMittal.

Arcelor holds about 16 percent of Macarthur, second only to Citic, the Chinese state-owned investment company that has a 24 percent interest; Citic opposed the offer from Peabody last year.

Citic, which also has a coal supply agreement with Macarthur, made it known at the time that it was unwilling to sell at any price. In conjunction with another major investor, the South Korean steel maker Posco, Citic can effectively block a takeover. In Australia, an acquirer must have 90 percent of shares to move forward with its plans.

If Macarthur remains a listed company in which Peabody and Arcelor simply hold a controlling interest of 50.01 percent or more, it would be difficult for the new owners to make significant changes to management, a person with knowledge of the matter said.

Peabody had initially bid 16 dollars a Macarthur share last year, but cut its bid after the Australian government began to consider a resource tax proposal.

There has been additional pressure on Australian miners. On Sunday, Prime Minister Julia Gillard’s Labor Party government disclosed the details of its carbon tax, which would impose a charge of 23 dollars on each metric ton of carbon emissions a company produced. Coal mining companies will be taxed for so-called fugitive emissions, or gases that escape naturally during their operations.

The planned carbon tax failed to discourage Peabody and Arcelor from their bid for Macarthur, but still weighed on many Australian stocks on Monday.

Macarthur’s shares, which closed Friday at 11.40 dollars, opened on Monday at 10.99 dollars, before rising to 11.08 dollars after news of the takeover bid.

The company, based in Brisbane, was also hit by floods that devastated Queensland last year. The natural disaster cost the company tons of production, although that was mostly offset by a rise in coal prices on fears it would become scarce.

Macarthur is known for its pulverized coal, a key ingredient in the steel-making process.

Article source: