S&P: Negative outlook for ArcelorMittal; steel demand trough ‘behind us’

S&P Global Ratings has reaffirmed its BBB- credit rating on the world’s largest steelmaker, ArcelorMittal, with a negative outlook, amid continuous pressure from weak market conditions. However, the steel demand “trough” is now behind us, the ratings agency said.

“Production halts in Europe and the US due to the COVID-19 pandemic resulted in an unprecedented steel demand drop in April, while demand will likely remain uncertain for the rest of the year,” S&P Global Ratings said in a statement Monday.

The agency said that with “the meltdown” of steel demand in the current quarter, it has revised downwards its expectations for ArcelorMittal’s financial performance for the rest of the year, assuming an underlying EBITDA of below $4 billion (down from $5.8 billion-$6.3 billion assumed in early February).

S&P Global Ratings issued its statement shortly after ArcelorMittal announced it is embarking on a capital-raising exercise worth around $2 billion, primarily to speed the reduction of its net debt – put at $10 billion on March 31 – to a target $7 billion. A Mittal family trust will participate in the capital raising, putting up $200 million.

Debt reduction is a “clear priority, to support credit metrics and bolster the foundation for consistent future returns to shareholders,” the steelmaker said in a statement Monday. “Today’s transaction complements the progress made in recent years to make ArcelorMittal more resilient to challenging environments, as well as more recently the efforts made to address the impacts of COVID-19 on the business.”

The ratings agency said that the $2 billion capital raising, together with an ongoing $2 billion divestment program and other initiatives, should support a net debt reduction of about $3 billion in 2020 and another $2 billion in 2021.

“ArcelorMittal is pulling different financial policy levers to manage the industry crisis and minimize the effect on its operations and financial results,” S&P Global Ratings said. “Rating pressure remains high since, under our base case, the company’s credit metrics are likely to be below the rating threshold for three years in a row.”

The negative outlook reflects a potential one-notch downgrade to ‘BB+’ in the coming three-to-12 months, if very weak steel market conditions persist, and the company is unable to deleverage, it said.

According to S&P Global Ratings, the weak steel industry conditions of 2019 have worsened in 2020, “but the trough is behind us.”

The steel demand slump this year will be a multiple of GDP contraction, according to the ratings agency, which is forecasting a global economic slowdown, with European GDP contracting 7.3% or more in 2020 and North American GDP by 5.2%

“However, based on different market indications it seems that the trough of the crisis was recorded in April, and a gradual recovery is about to begin. This forecast is also supported by our macro base case, with European and North American GDP expected to rebound to 5.6% and 6.2% growth respectively in 2021. That said, the shape of the recovery remains unclear.”

“Overall, we expect 2021 steel production in Europe and the US will be down 2%-3% on 2019,” the agency said.

S&P Global Ratings and S&P Global Platts are both part of the S&P Global group.

— Diana Kinch