Western steelmakers drowning in a sea of debt

DEBT in the world’s top 30 steel companies totals a record $150-billion (about R2-trillion), international accountancy firm EY said this week, adding that the actions of governments to support the sector would work only if matched with more radical industry restructuring.

Overcapacity and weak steel prices have piled pressure on firms such as Tata Steel, which is in merger talks with German conglomerate Thyssenkrupp.

EY said in a report on Thursday that steel firms had taken on debt as they fought for market share. Notably, the Chinese steel sector has added about a billion tons of capacity since 2000, helping to take global excess capacity to about 700 million tons.

The debt of the top 30 companies is dwarfed by China’s steel sector debt, estimated at $500-billion.

“Many steelmakers are in some form of distress with some teetering on the verge of bankruptcy,” said EY global steel leaderAnjani Agrawal.

Government efforts would only work if the industry had viable business models, he said.

Thyssenkrupp, the world’s 16th-largest steel producer by tonnage, has announced the sale of real estate assets and embarked on merger talks with Tata. At the end of June, the firm had gearing of 175%, versus 124% a year earlier, and debt of à4.77-billion (R72-billion) compared with à4.39-billion the previous year. It aims to reduce its gearing to less than 150% by the end of next month and told an analysts’ call it should meet that target.

The world’s largest steelmaker, ArcelorMittal, has tackled its debt with a $3-billion rights issue.

It also sold a $1-billion stake in a Spanish automotive steel group Gestamp in April. Net debt was $12.7-billion at the end of the first half of 2016, down from $17.3-billion after the first quarter. Gestamp says it will be in positive cash flow territory by the end of the year.

China has promised to reduce steel capacity by 45 million tons this year, but cuts in the first seven months were only 47% of this target.

To protect Western firms from Chinese steel, which the US and Europe says is sold at less than cost price, Washington and Brussels have imposed duties, prompting criticism from China.

European steel representatives say Chinese firms should carry out most of the restructuring, given the size of their debts, but they are not assuming that will happen and all measures will be needed for the sector to survive.

“For the next five to 10 years there will be substantial pain,” said Brussels-based lawyer Laurent Ruessmann, a partner at Fieldfisher, who represents steel firms and is specialised in China and trade law.

“It should be principally in China, but it will be principally here unless we have effective trade measures.” —

Many steelmakers are in distress with some teetering on the verge of bankruptcy. The industry needs viable business models