ArcelorMittal reports $4.3-bn write-down of Europe units

Top steelmaker's rating cut to Bb+ from Bbb- by Fitch after same moves by S&P and Moody's

ArcelorMittal, the world’s biggest steelmaker, will write down the goodwill in its European businesses by about $4.3 billion as the region’s weakening economy erodes demand and leaves producers with excess capacity.

The writedown will take the form of a non-cash impairment charge recorded in the fourth quarter of 2012, the Luxembourg- based company said today in a statement. Steel consumption in Europe has dropped by about 8 per cent this year, it said.

“The outlook remains challenging,” said Tim Cahill, an analyst at J&E Davy Holdings Ltd in Dublin. “The disappointing thing is that this announcement does not include further plant shutdowns. The only real solution to the structural problems in the European steel market will be further plant closures.”

ERODING DEMAND
ArcelorMittal will write down the goodwill in its European businesses as the region’s weakening economy erodes demand and leaves producers with excess capacity

• $4.3 bn Goodwill writedown in European businesses
• 8% drop in steel consumption in Europe this year
• 210 mn tonnes of steel the region can produce in a year
• 150 mn to 160 mn tonnes Demand in a 'normal market' 
• Writedown to take the form of a non-cash impairment charge recorded in the fourth quarter of 2012

ArcelorMittal, headed by Lakshmi Mittal, is among European steelmakers grappling with how to shutter unneeded furnaces whose output is weighing on prices.

The region can produce about 210 million tonnes of steel a year, while demand in a “normal market” is 150 million to 160 million tons, according to industry lobby group Eurofer.

Steel-industry earnings have slumped as Europe’s economic crisis saps demand and slower Chinese growth weighs on commodity prices.

ArcelorMittal reported the lowest quarterly profit in almost three years in October and is moving output to cheaper locations and idling plants.

India’s Tata Steel Ltd said November 23 it was cutting 900 jobs and closing 12 sites in the UK.

ArcelorMittal fell as much as 3.4 per cent in Amsterdam trading, the biggest decline in seven weeks, and traded down 3 per cent at euro 12.887 as of 9:52 am local time. The benchmark Amsterdam Exchanges Index was 0.7 per cent lower.

The “weaker demand environment, and expectations that it will persist over the near and medium term, led to a downward revision of cash-flow expectations underlying the valuation of the European businesses to which goodwill has been allocated,” ArcelorMittal said.

ArcelorMittal’s net debt and earnings before interest, tax, depreciation and amortisation, as well as compliance with debt covenants, are unaffected by the impairment, according to the company.

When companies make an acquisition, the difference between the value of the target’s hard assets and the purchase price is known as goodwill.

That gets carried on the company’s balance sheet as an asset and is reviewed periodically by public companies.

Vale SA, the world’s largest iron-ore producer, said yesterday it will book a $4.2 billion charge that includes a reduced valuation on its 22 per cent stake in aluminum producer Norsk Hydro ASA. The Brazilian company cited “macroeconomic uncertainties” confronting Europe.

In Germany, steelmaker ThyssenKrupp AG took a euro 3.6-billion($4.8 billion) writedown on its Americas unit on December 11.

ArcelorMittal had its debt rating cut to Bb+ from Bbb- by Fitch Ratings today, which cited a “more challenging than previously expected outlook for western European steel markets in 2013.” The downgrade follows a move by Standard & Poor’s to lower ArcelorMittal’s rating to junk on August 2 and a cut by Moody’s on November 8.