Cutting European Steel Overcapacity? Not If France Has Its Way

We’ve been dealing with fiscal cliff concerns here in the US for the past couple months, and US steel companies and other manufacturers are concerned about what that will mean for their businesses.

But it seems an even more absurd situation is playing out in France at the moment. US manufacturers — and especially the likes of large steel producers — should be glad they’re not making business decisions having to deal with France’s Industry Minister Arnaud Montebourg (holding the blender in the photo).

Mountebourg has basically been making it very hard for ArcelorMittal to reduce capacity (and hopefully increase European current steel prices - MetalMiner IndXsteel prices) by closing two furnaces at the Florange site in Lorraine, according to an article in the Financial Times — he’s gone so far as to threaten a state takeover of the plant, prompting Le Monde to pen this headline: “Montebourg declares war on Mittal.”

The French industry minister has a bone to pick with Lakshmi Mittal personally, namely because, well, that’s what the French do — according to the FT article, French ministers singled Mittal out when he swallowed Arcelor back in 2006.

Here’s what it boils down to:

ArcelorMittal, like many other steel majors, is having a tough time making any money. Inputs-wise, raw materials costs, among myriad other factors, show no sign of dropping precipitously, and as for labor costs, there’s nowhere to go but up. (This is especially true in France, and Europe in general.)

Pair that with overcapacity — Jefferies analysts estimate “Europe’s steel industry has about 210 million metric tons of yearly capacity and 150 million tons of demand,” according to the FT — and production cuts must be made.

But ArcelorMittal is looking to target the labor-cost component — cutting jobs — and that’s apparently what’s not cool with Montebourg and his protectionist Socialist colleagues, who are likely being dispatched by the government to pacify the unions.

Seth Rosenfeld, European metals and mining analyst at Jefferies, sums it up well:

“Companies like ArcelorMittal have their own stakeholders they must answer to, namely their investors, and it is simply not sustainable to operate plants that don’t make a profit. Governments need to recognise that they must support the profitability of companies to enable the long-term future of industry, but for the moment they are just looking at jobs.”

That seems to ring a bell on this side of the pond. Supporting “the profitability of companies” for the long-term should be the focus for any government, instead of short-term job solutions.

As the fiscal cliff looms, this case in France serves as a cautionary tale for how President Obama and the US Congress will affect US business and manufacturing. Trust us: steel companies, for one, are following closely.

By Taras Berezowsky