Jiri Kominek in Prague -

The global economic crisis has brought tough times for ArcelorMittal that are perhaps harder than the steel it produces, which could force a sale of its Czech operations.

With construction ground to a halt and automobile production down substantially, steel prices have dropped by 48% since late 2008, leaving Lakshmi Mittal's global steel empire with a cash flow problem. During the second quarter, ArcelorMittal swung to a loss of $792m from a $5.8bn profit in the year-earlier period.

The drop-off in demand for steel and subsequent cash flow problems have fuelled speculation that Mittal will either shut down or, more likely, sell off ArcelorMittal Ostrava (AMO), the largest steel operation in the Czech Republic. And at least three independent sources linked to AMO have told bne that Mittal intends to do just that. "Mittal will either shut down AMO or sell it to another investor, because it already has a large steel producing operation located no more than 150 kilometres to the north in the Polish province of Silesia. It does not make sense to keep both operations running, particularly when wages in Poland are 40% lower and the workforce is equally skilled as in the Czech Republic," one steel industry source says.

While AMO has been forced to cut at least 300 jobs at the Czech plant that at the start of the year employed 6,600, north of the border in Poland Mittal was forced to sack 1,500 at two of its plants, which employ over 10,000.

For its part, AMO maintains there are no plans to do either at a time when business appears to be picking up as industry stockpiles dry up and require replenishment. "In general, the dynamics of production in our plants follow the general developments in our industry in Europe and America. Our production in the first five months was 40-45% of what we were producing last year. Since June, we have been observing some improvement and we hope it is a lasting trend. Currently, we are operating two blast furnaces. There indeed had been a contingency plan to operate with one blast furnace if the situation had not improved by the end of mid-2009, but now both the blast furnaces are running at 100% and all our facility operates at about 50%, which is very good news for our employees and our region," Vera Breiova, a spokesperson for AMO tells bne. "And I emphasize: the rumors concerning operations shifting to Romania or Poland are absolutely untrue."

Analysts say that while it is true demand for steel and other raw materials appears to be rising as manufacturers exhaust stockpiles, they point out that no one knows how long this resurgence will last. "It may only go on for one quarter or so," says Jiri Zendulka of Capital Partners.

Potential buyers

Analysts say that if Mittal were to sell AMO, it would most likely do so to a financial, rather than strategic, investor, as the latter are currently having similar problems. "Other European steelmakers in Germany and elsewhere have similar problems to Mittal, therefore any potential investor would come from the private equity sector in the form of Czech or Slovak investment groups, or someone from outside of the country and out of the sector who has a lot of cash," reckons Petr Novak, an analyst at Atlantik Financial Markets.

These private equity investors could include firms such as Netherlands-based PPF Group, which already controls 14% in AMO and has demonstrated an appetite for taking over distressed assets. Czech-Slovak private equity firm Penta Group has also demonstrated an ability and willingness to acquire new assets despite the recession. In June, Penta purchased bankrupt Polish wire maker Drumet for CZK716m (€28.6m).

Well informed industry sources also say that Czech coal baron Zdenek Bakala would be keen on acquiring AMO since his New World Resources already supplies the steelmaker with coal from the nearby OKD anthracite mines and the acquisition of AMO would enable him to create a vertically structured business. "We evaluate all investment opportunities as they present themselves, but we do not comment on hypothetical situations," a spokesman for Bakala Crossroads Partners tells bne. Crossroads Partners is Bakala's investment vehicle that owns RPG Industries, which in turn controls 64% of London-listed New World Resources.

The situation may become clearer following a shareholder meeting planned for August 20. Despite its financial woes, AreclorMittal may be in the driver's seat with respect to dispensing with AMO. On July 28, the Czech government agreed to sell its 11% remaining stake in AMO to ArcelorMittal for CZK7bn in exchange for the steelmaker dropping an arbitration proceeding against the state in an agreement reached at the end of June. The agreement allows ArcelorMittal to increase its stake in AMO to 83% and repay the government in full by 2015.

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