ArcelorMittal: fulfilling sustainability expectations in the time of financial crisis

By Mateusz Frączek | 05th January 2021

In recent years, sustainability issues drive business strategies and industry trends to a far greater extent than in any previous decade. Corporate managers and enterprise owners begin to acknowledge the impact their firms have on the surrounding world and they try to minimize their negative footprint. The same applies for ArcelorMittal, the international steel conglomerate, which, tougher than ever, fights for reducing the environmental harm it causes. Nevertheless, in the recent history, there was no more difficult time to stay committed to sustainability while fulfilling financial responsibilities and shareholders' expectations. How does the company navigate around these priorities and what does it do to ensure the company’s long-term, resilient future?

COVID-19 affected all industries, and the steelmakers were no immune to the blow. “[The] crisis had delivered the “single biggest hit” to demand I have seen in my career” says Mr Roland Junck, the interim chief executive of Liberty Steel Europe & UK. The major contributor to the fall was particularly low demand from car manufacturers and construction companies whose operations were temporarily closed in an attempt to curb the rise in COVID-19 cases.  

The best example of how devastating an effect the pandemic had on the sector is the recent annual report of Tata Steel Europe which not only incurred £857m loss in the year ended March 2020, before one-off items, but the company also warned about its ability to carry on operating. ArcelorMittal followed suit by reporting $1bn in first-quarter losses and suspending its dividend. In comparison with 2019, the company’s EBITDA plunged by 65% in the second quarter too.

The situation is not improved by the so-called Achilles heel of the market, namely oversupply. With the global 1.87bn tons of steel output in 2019, the overproduction is estimated at about 500m, roughly a third of the overall manufacture. As a result, prices and profits are low. “What needs to happen is maybe less consolidation, and a bit more capacity closing,” said a banker who advises European steel manufacturers.

Despite the economic factors speaking behind the closure of many facilities in China and Europe, the steel industry is still being regarded by governments as a symbol of national economic strength and politicians are reluctant to close plants. However, there are some changes in this respect recently as e.g., German Thyssenkrupp, Europe’s second-largest steelmaker, sold €17bn worth of elevator assets earlier this year.

Even without sustainability expectations on its shoulders, it can be already said that ArcelorMittal has a tough time in front of it. Nevertheless, as it usually is the case, the next burden on the steel industry comes from regulators, and particularly those in the EU. Pressurized by environmental activists, campaigners and the demands of the wider population, the EU governments are gradually curbing the limits of CO2 emissions. It is of an essential importance for steelmakers who account for nearly 10% of global carbon emissions footprint. With the EU further commitment to become carbon neutral by 2050, steel producers have a tiger by their tail with the business model truly needing a major redefinition. However, the current state of affairs in the sector is, mildly put, not promising. "We, in the steel industry, have been working for more than 1,000 years with process developments, but wehave never ever taken any big technological step” said Sweden’s SSAB chief executive Martin Lindqvist.

It is no doubt that under so much societal, managerial and financial strain, many would just give up and follow the herd. However, despite such a sheer number of stakeholder commitments it has, ArcelorMittal seems to be very successfully navigating around sometimes contradicting goals. Let ustake a closer look at what the company does and how it managed to boost its share price almost threefold over the past 9 months.

After the first wave of coronavirus cases had flattened out, the steelmaker’s executives did not lose any single day in preparation for the worst-case winter scenario. To fortify its balance sheet and address post-COVID liquidity issues, the company committed to finally cutting its debt levels from $9.5bn to $7bn. To achieve this aim, in May, it announced raising additional capital amounting to about 20 percent of its market capitalization. The issued instruments included a mixture of ordinary shares and mandatory convertible bonds, which, at the bond’s maturity, obligate the firm to hand back stock to investors, instead of face value cash repayment. The Mittal family, who runs the business, contributed almost $200mn themselves.  

Another move was to address the sector’s overcapacity and price volatility, by downsizing the company’s non-current assets base. The strategy not only consolidated Arcelor’s scattered operations but also strengthened the firm’s balance sheet and financial security. In June, the Québec Cartier Mining Company which consists of 420km-long railway and other mining infrastructure, was being considered for sale. Further, in September, Arcelor closed the $1.4bn deal with rival Cleveland-Cliffs under which the steelmaker will sell its US assets in return for $500m in cash and the rest in stock.

With so much going on in their assets and capital portfolios, there should be virtually no time or resources to devote to sustainability commitments. However, despite such practical assumptions, the company managed to respond to its third responsibility, the EU’s environmental pressure. Arcelor pledged to trim 30 per cent from its carbon emissions in Europe by the end of the decade and it is truly pioneering the development of direct reducediron (DRI) which relies on hydrogen, instead of heat from coal-fueled blast furnaces, to remove oxygen from iron ore. The firm currently operates the only DRI facility in Europe and, in spite of all challenges this year brought, it intends to build another one in Hamburg at a cost of about €110m. However, as hydrogen is at least four times more expensive than coal, the ball is now inthe regulators hands which have to ensure that the switch to green steelmaking in the EU remains internationally competitive.

Clearly, this year ArcelorMittal and other companies from the steelmaking sector had to fight on multiple fronts to fulfil all of their stakeholder’s obligations.  The task was not an easy one but those who managed to steer their companies in the direction of financially stable and sustainable future will begin an upcoming year with a significant competitive advantage. Having proved its managerial capabilities and wise resource allocation, Arcelor can emerge from the crisis as more consolidated, financially resilient and purpose-led business, paving its way as an environmentally responsible and internationally respected enterprise.