Noront Resources

ArcelorMittal Threatened by Loan Terms as Prices Fall (Update1)

By Mark Herlihy

April 28 (Bloomberg) -- ArcelorMittal, the world’s biggest steelmaker, will probably seek to renegotiate terms on 27.5 billion euros ($36 billion) of loans after cutting production by almost half amid collapsing demand.

The Luxembourg-based company, which will likely report a second consecutive quarterly net loss tomorrow, has to boost earnings over the rest of the year to avoid a breach of debt covenants, said Jonathan Pitkanen, a bond analyst at Aviva Plc. Steel demand must recover to avoid such an outcome, said Ingo Schmidt, an analyst at Hamburger Sparkasse in Hamburg.

ArcelorMittal, which was formed through the takeover of Arcelor SA by Mittal Steel Co. in 2006, has cut output as much as 45 percent in an effort to balance supply with demand. Steel prices plunged to a six-year low on dwindling orders from automakers and builders. Global demand will drop 15 percent in 2009, the World Steel Association said yesterday.

“When companies are at risk of breaching covenants they need to start negotiating with their banks, and the earlier the better,” Philippe Landroit, an analyst at HSBC Treasury and Capital Markets, said in an interview. “They may ask the bank to amend the covenants, which is where they would give better terms to their banks, resulting in sharp increases in lending costs.”

The steelmaker’s first-quarter net loss was probably $594 million, according to themedian of five analyst estimates compiled by Bloomberg. That compares with net income of $2.37 billion, or $1.68 a share, a year earlier. The company reports earnings tomorrow at 7 a.m. Luxembourg time.

Company Forecast

ArcelorMittal, led by Chief Executive Officer Lakshmi Mittal, 58, has forecastearnings before interest, tax, depreciation and amortization of $1 billion for the quarter. Its covenants require debt to be less than 3.5 times Ebitda, Landroit said. Pitkanen estimates full-year Ebitda will have to be about $7 billion to avoid breaching covenants.

“Even if they do manage to cut costs, their guidance of $1 billion for the first quarter will not be enough if this is the run rate for the rest of the year,” he said.

Nicola Davidson, a spokeswoman for ArcelorMittal in London, declined to comment on the earnings and production plans. Spokeswoman Lynn Robbroeckxdeclined to comment on the company’s borrowings.

The steelmaker sold 1.1 billion euros of bonds and refinanced $1.2 billion of credit in the past two months. It has to make repayments on bonds and loans of 1.1 billion euros in 2009 and 3.7 billion euros in 2010, according to data compiled by Bloomberg. Total debt, including loans and bonds, is 33.1 billion euros, according to Bloomberg data.

‘Mild’ Recovery

The cost of insuring against default on ArcelorMittal’s five-year bonds rose sevenfold in the past year. Credit-default swaps closed yesterday at 800.667 points. ArcelorMittal dropped 1.53 euros, or 7.7 percent, to 18.35 euros by 10:07 a.m. in Amsterdam trading. The stock is the worst performer today on the nine-company Bloomberg Europe Steel Index.

Steel demand is set to stabilize in the latter part of 2009, leading to “mild” recovery in 2010, the World Steel Association said yesterday. German car registrations in March rose to the highest since 1992 after the government began paying owners to trade in old vehicles for new models. Sales in China of cars, minivans and multipurpose vehicles rose to a record last month. Automakers are the fourth-biggest user of steel, according to the association.

Mining Acquisitions

“The first-half will be pretty poor, but by the third or fourth quarter demand will improve,” said Peter Fish, an analyst at Sheffield, England-based metals consulting company MEPS (International) Ltd. The time is approaching when so-called destocking, in which customers use up inventories, ends and new orders will be made, he said.

ArcelorMittal spent $3.8 billion on acquisitions since the start of 2008, according to data compiled by Bloomberg, as it sought greater control over supplies of iron ore and coking coal, raw materials that soared to record prices last year. The company paid $809.9 million for London Mining Plc’s Brazilian iron ore operations in August and $475 million for Bayou Steel Corp., a producer of steel in Louisiana and Tennessee, in June.

Since then, steel prices have tumbled. European hot rolled coil, a benchmark steel product used in cars and construction, slumped 56 percent since reaching a record high of 815 euros a metric ton in June, according to data compiled by Metal Bulletin. Demand for steel in the European Union, which accounted for 54 percent of the company’s sales in 2008, will fall as much as 45 percent in the first half, industry lobby group Eurofer said last week.

Shutting Furnaces

ArcelorMittal shut blast furnaces in response. Rivals including Corus, the European unit of India’s Tata Steel Ltd., Japan’s Nippon Steel Corp. and Germany’s Salzgitter AG followed suit. Global production last month dropped 23.5 percent compared with a year earlier, the World Steel Association said March 21.

ArcelorMittal said in February capital spending in 2009 will be $3 billion, a third less than previously forecast. The company said last week it may cut the size of a planned steel plant in India by half and indefinitely defer a second facility.

“Production cuts should remain in place until August or September,” said Michael Shillaker, an analyst at Credit Suisse Group in London who has an “outperform” rating on the stock.

We need patience.

Kind regards,

Inca