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Even if British Steel is rescued, problems won't be over

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
Finished galvanized steel coils await shipment at ArcelorMittal Steel's hot dip galvanizing line in Cuyahoga Heights, Ohio. Photo: AP Photo/Mark Duncan, File

ArcelorMittal (MT.AS), the world’s largest steelmaker, has slashed European steel production targets, citing weak demand.

The move, announced on Wednesday, underlines the problems faced by British Steel even if a white knight does ride in to rescue the collapsed industrial business.

British Steel last week collapsed into administration, putting 5,000 UK jobs at risk and throwing into question 20,000 jobs in its supply chain. It came three years after the struggling company was sold to a private equity firm for just £1.

The government said this week that it is in discussion with 80 possible bidders for the business who could buy it out of administration.

However, ArcelorMittal’s announcement highlights that job and production cuts may be inevitable even if British Steel escapes total collapse. The announcement from the Luxembourg-headquartered steel giant is the second production cut in just a month.

ArcelorMittal cited “weak market demand and high import levels in Europe.”

“This is again a hard decision for us to have taken,” European CEO Geert van Poelvoorde said, “but given the level of weakness in the market, we feel it is the prudent course of action.”

Shares in ArcelorMittal fell by as much as 7% in Amsterdam in reaction to the news.

Why are ArcelorMittal and British Steel in trouble? Most of the problems stem from China, which has been pumping out huge amounts of steel at discount prices for years. The unbelievable stat that did the rounds when British Steel collapsed was that China had produced more steel in the last two years than Britain has in total since 1870.

Faced with such a glut in supply, Europe is struggling to compete. Add to this the higher cost of powering European factories and US tariffs on EU steel, and you start to see just how hard a task it is to try and turn around British Steel.

All of these problems aren’t going away either. Deutsche Bank’s Bastian Synagowitz said in a note to clients earlier this month that he doesn’t expect steel prices to recover until at least the third quarter of 2019 “as macro risk has risen, and we are heading into a seasonally weaker period.” (Macro risks is analyst-speak for the fact that the US-China trade war shows no signs of ending.) Synagowitz added that he also sees “demand deceleration from last year's levels.”

All in all, the outlook for the European steel industry is bleak. Even if British Steel does find a buyer, don’t expect last week’s collapse to be the final piece of bad news we hear on the company.

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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at@OscarWGrut.

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