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 percent 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.”
ArcelorMittal is among European steelmakers grappling with how to shutter unneeded furnaces, whose output is weighing on prices. The region can produce about 210 million metric tons 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 Nov. 23 it was cutting 900 jobs and closing 12 sites in the U.K.
ArcelorMittal fell 2.5 percent to 12.88 euros by the close in Amsterdam trading, the biggest decline in seven weeks. The benchmark Amsterdam Exchanges Index dropped 0.7 percent.
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.
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.
ArcelorMittal’s net debt and earnings before interest, tax, depreciation and amortization, as well as compliance with debt covenants, are unaffected by the impairment, it said.
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 percent stake in aluminum producer Norsk Hydro ASA. The Brazilian company cited “macroeconomic uncertainties” confronting Europe.
In Germany, steelmaker ThyssenKrupp AG took a 3.6 billion-euro ($4.8 billion) writedown on its Americas unit on Dec. 11.
ArcelorMittal today had its debt rating cut to BB+ from BBB- by Fitch Ratings, 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 Aug. 2 and a cut by Moody’s Investors Service on Nov. 8.