Arcelor’s Ilva exit threat seen as bargaining tool

Although Luxembourg-based steelmaker ArcelorMittal leaving the Italian market seems more likely now than before, many see today’s announcement as a final attempt to negotiate with the Italian government.

The company notified the government of its withdrawal from the lease agreement for the Ilva assets, citing law changes that make its operations unviable. The assets, which include Europe’s largest blast furnace, located in Taranto, are loss-making and ArcelorMittal has faced various obstacles to the execution of its commitments since it took over in October 2018.

ArcelorMittal’s announcement today, which some deemed a shock tactic, is expected to bring the government back to the negotiation table with a more lenient approach and draw up a more suitable agreement enabling operations to continue.

The scenario of ArcelorMittal exiting the Ilva investment would be a lose-lose situation for both the Italian government and the company, some market participants said. The assets being handed back to the extraordinary administration in 30 days would require a large cash injection to keep them running and a rapid structural re-organisation, which the Italian government may not be willing, or able, to provide.

And many expect that a withdrawal of the world’s largest steelmaker would see Italy struggle to find interested investors for Ilva further down the line.

Market participants anticipate a swift response from the trade unions, likely in the form of strikes, as they side with ArcelorMittal and pressure the government to give legal protection to the company. “At this point, we ask the government to intervene and the company to withdraw from this decision,” secretary general for CISL Annamaria Furlan said in a statement today. “No company is able to produce in a difficult environment, in a heavy climate, having everyone against it, from the government to the region to the municipality of Taranto,” general secretary of Uilm Rocco Palombella said.

But it is not in the company’s favour to leave Ilva either, as its assets, although producing significantly below capacity, include Europe’s largest blast furnace, which in the hands of a competitor, could pose a significant threat to the company’s European market share. But some expect the only scenario in which ArcelorMittal will continue with its Ilva venture is via a change to the law restoring its penal shield.

Others believe ArcelorMittal is not looking to negotiate further with the government and will follow through with its threat to exit the plant. The company is employing upwards of 9,000 people at Ilva, and making about 4mn t/yr, a similar amount to other installations with significantly less staff.

As of 16:37 GMT, ArcelorMittal’s share price was up by more than 3.9pc on Euronext, at €14.58.

Market participants agree that uncertainty in the global steel markets, and especially in Europe, have been a factor in driving prices down in the past months. But uncertainty about ArcelorMittal’s future in Taranto now could give much-needed support to Italian pricing, which could eventually spill over to the rest of the EU. In a brief note today, investment bank Jefferies said “uncertainty” around Ilva’s continued operations could support regional prices.

Argus‘ daily Italian index was €385/t ex-works today, while the northwest Europe index was static at €414.25/t ex-works.