Spin-Off Alert: Value in ArcelorMittal's Stainless Steel Unit? (MT, PKX, TYEKF, ANIOY, OUTKF, CRS, ATI)

The world’s largest steelmaker is giving up on stainless steel. ArcelorMittal (NYSE: MT) has announced that it plans to go through with a plan it began discussing during the summer that would spin-off the company’s stainless steel division. The transaction is expected to take place in the first quarter of 2011, pending shareholder approval of the move.

Competition in stainless steel manufacturing is fierce, with South Korea’s POSCO (NYSE: PKX) and Germany’s Thyssen Krupp AG (OTC: TYEKF) leading the pack. Spain’s Acerinox SA (OTC: ANIOY) and Finland’s Outokumpu OYJ (OTC: OUTKF), together with US firms Allegheny Technologies Inc. (NYSE: ATI) and Carpenter Technology Corp. (NYSE: CRS) also produce significant amounts of stainless steel, which is sometimes called inox steel.

Arcelor plans to issue one share of stock in the stainless steel business for every 20 ArcelorMittal shares held on the record date. The new shares will be listed on the Euronext Paris, Amsterdam, and Luxembourg stock exchanges, but will trade only registry shares over-the-counter in the US. Shares in the stainless steel company will not be registered with the US Securities and Exchange Commission.

Arcelor will take a non-cash impairment charge of about $800 million when the spin-off is completed. The new stainless steel company will begin its life with net debt of about $1 billion, a combination of existing Arcelor debt that will be transferred to the new company and new debt that the company will incur.

Arcelor’s decision was precipitated by low prices for stainless still and falling demand for the metal. The company produced about 1.6 million metric tons of stainless steel in the first nine months of this year at its plants in Belgium and Brazil.

In 2009, the company’s total sales for all its products topped $65 billion on shipments of more than 71 million metric tons. Stainless steel accounted for less than 1.5 million metric tons of shipments and just $4.2 billion in sales, or about $2,800 per metric ton. That was 31% less than the 2008 price/metric ton. In the first half of 2010, sales improved, as did pricing, which is up 8%. However the long-term outlook for stainless is not particularly cheery, as costs will continue to rise and industry over-capacity will keep prices down..

The spin-off of Arcelor’s stainless steel division could lead to some badly-needed consolidation. The industry sits on a lot of unused capacity, and one way to fix that is to buy up a competitor. That’s the next thing to look for.

Paul Ausick