ArcelorMittal faces a quandary the size of China

Sometimes a company prays for a strong Chinese economy not so that it can sell more products to China, but so that the country will sell fewer products to the world.

Take ArcelorMittal. Its revenues rose by 20 per cent last year to $94bn, and its crude steel output edged up to 91.9m tons. The distance separating ArcelorMittal, the world’s largest steelmaker, from second-placed Hebei Iron & Steel of China is impressive. It is as if a gold medallist at London’s upcoming Olympics were to throw the javelin almost twice as far as the silver medallist.

There is, however, a twist. ArcelorMittal’s founder Lakshmi Mittal puts a brave face on matters, but the truth is that his company produces and sells little steel in China. Beijing refuses to let foreign steelmakers take majority stakes in large Chinese companies, so ArcelorMittal, which only makes about 7 per cent of its steel in China, must rest content with two modest joint ventures.

Yet China, as a nation, is the world champion of steel producers. It stretches its lead every year. According to the World Steel Association, China made 695.5m tons of crude steel last year, or 45.5 per cent of global output. In 2006, China made 421m tons, or 33.7 per cent of output.

No less remarkable than these tremendous increases is the fact that Japan, the world’s second largest steel producer, made a mere 107.6m tons last year. In other words, the Chinese gold medallist threw the javelin more than six times as far as Japan’s silver medallist.

For ArcelorMittal, which produces about 6 per cent of the world’s steel, such trends are troubling. It is desperate to protect its global market share without suffering the price pressures that might emerge as a result of fast increasing Chinese production. Yet its Chinese rivals need to sell their steel somewhere.

The best hope is that China records buoyant economic growth this year. In principle this would absorb much of the extra domestic steel output and, as a happy side effect, curb the appetite of Chinese companies to seize world market share from ArcelorMittal. Not for nothing is ArcelorMittal counting on 8 per cent growth in China in 2012.

In Europe the steel story is different but familiar to anyone who knows the auto sector: structural overcapacity in the industry, and a backdrop of low long-term economic growth. These are nuts that even Mr Mittal finds hard to crack.

The Indian billionaire will forever be known as the businessman who defied the received wisdom of the 1990s that steel was an industry on which the sun was setting after 150 years. By creating a group that now employs 260,000 people in more than 60 countries, Mr Mittal showed how to make healthy profits out of steel.

But ArcelorMittal is aware that European steel demand is unlikely to return for the foreseeable future to the levels seen before the 2008 financial crisis. With European plants accounting for about 40 per cent of his company’s output, this leaves Mr Mittal with little choice but to slim down his operations.

The process is already in motion. The closure in October of two blast furnaces in Belgium was the first such action since the company’s 2006 creation out of the €26.9bn merger of Mittal Steel and Arcelor. Elsewhere, mills are idle in Spain and a voluntary redundancy scheme is in full swing at a Czech plant.

However, none of these actions gets to the heart of ArcelorMittal’s strategic problem. The 2006 merger was founded on the twin assumptions of an Asian hunger for steel which the company could feed for decades to come, and a resilient European market primed for its high-tech products. The strategy was and is not completely misplaced. But it has suffered a blow from Europe’s debt crisis, which has knocked the stuffing out of cars, construction and other steel-buying sectors. At $10.1bn, the company’s earnings before interest, tax, depreciation and amortisation last year were less than half those of 2008. The steep decline over the past three years in ArcelorMittal’s share price – and therefore in Mr Mittal’s immense personal fortune – was all but unavoidable.

Cramped in Asia and on the back foot in Europe, ArcelorMittal, the steelmaker par excellence, now styles itself a “steel and mining company”. Iron ore and coal account for less than 10 per cent of its business, but mining is growing fast and makes a tidy profit. The company now has a specialist mining management team and reports its results as a separate segment.

Time will tell if this is a sensible response to ArcelorMittal’s challenges on the steel front. But digging raw materials out of the ground was not exactly what Mr Mittal had in mind when he executed his famous 2006 merger.

Tony Barber is the FT’s Europe Editor

tony.barber@ft.com