Hollande Victory May Be Pyrrhic

http://www.nytimes.com/2012/12/03/business/global/hollande-victory-may-be-pyrrhic.html

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When it ended a face-off with the world’s biggest steel company Friday evening, the French government cast the outcome as a job-saving victory.

In return for the Socialist government’s dropping a threat to nationalize a steel making complex at Florange in northeast France, the company, ArcelorMittal, agreed to drop plans to lay off more than 600 workers at two blast furnaces there. ArcelorMittal, a Luxembourg-based company run by an Indian-born billionaire, also agreed to invest €180 million, or $234 million, in steel finishing operations at the same site over the next five years.

The deal does impose some unwanted expenses on the company, which is struggling financially in the weak global economy. But the bigger costs could prove to be the political ones the episode has created for the government of François Hollande, the French president, whose popularity was already on the wane.

Unions are angry that the government failed to follow through on its threat to nationalize the site in France’s former industrial heartland, and that the two blast furnaces under dispute will remain idled. Edouard Martin, head of the C.F.D.T. union at the site, accused the government of “having lied all along” about its intentions.

“Up until the last, we were led to believe a temporary nationalization was a given,” he said in a radio interview Saturday.

Meanwhile, French business leaders fear that the government’s threatened takeover of the plant, even if it did not come to pass, has sent a further chill through the global investment community following the Socialist government’s big tax increases for the rich.

“Investors don’t understand France anymore,” Laurence Parisot, head of France’s largest employers’ association, Medef, said in a radio interview.

“Planning to nationalize, starting a debate on it, is scandalous,” she said. “One should remember that nationalization is expropriation.”

The affair has left Arnaud Montebourg, Mr. Hollande’s minister for industrial renewal, politically isolated. It was Mr. Montebourg who first raised nationalization as an option, fanning the confrontation with ArcelorMittal. By the end of the weekend, critics of the left-leaning Mr. Montebourg were saying that his ministerial credibility was now so compromised that he should resign.

Mr. Montebourg rejected such talk in a television interview late Saturday and said that nationalization remained on the table as a “dissuasive weapon” if ArcelorMittal failed to stick to its commitments for the Florange site.

The Hollande government can rightly claim that it forced ArcelorMittal to back off from its plan to cut jobs at Florange while France’s unemployment was already over 10 percent and while other major employers, including PSA Peugeot Citroën, Air France and the drug maker Sanofi, were cutting French jobs by the thousands.

And yet the deal hammered out by the Élysée Palace and executives of ArcelorMittal does not appear to involve major concessions by the company.

In early October, it had announced plans to close the two blast furnaces at Florange, where it employs 2,700 workers over all. And the company still expects that those furnaces, which have been idled for 18 months for lack of demand, will remain shut down — although they will not be demolished in case they can be used in the future. The company also says that it will consider various solutions for the 630 or so affected workers, including other jobs within the company and early retirement offers.

And the €180 million it agreed to invest in other parts of the plant is money it might very well have spent anyway. The investment will be in processes that shape raw steel for uses like car panels and beverage containers. These downstream operations are valuable to the company because they serve industrial customers in France and elsewhere in Northern Europe. ArcelorMittal has good business reasons to maintain its big presence in France, where it has about 20,000 workers over all and where the French auto industry is a major user of its steel.

The company had already announced, in early October, a €7.2 million investment in an existing high-tech galvanizing steel line at Florange.

The fight with France, however, also highlights that ArcelorMittal, a behemoth with 260,000 employees worldwide and $94 billion in revenue last year, is nonetheless a struggling company.

It was created by the megamerger of Arcelor with Mittal Steel in 2006. In the two years or so after the combination, the company thrived in a booming world economy. But the global downturn exacted a high toll. And more recent results have been painful for the company and for its biggest individual shareholder, Lakshmi Mittal, the billionaire who is its chairman and chief executive.

The company posted a third-quarter loss of about $49 million on $19.7 billion in sales. Moody’s Investor Service downgraded ArcelorMittal’s debt to junk status in early November, seeing the company’s operating environment as “more likely to get worse before it gets better.” The board has asked shareholders to approve cutting the dividend, which was 75 cents a share in 2011, to 20 cents a share next year.

The worst performing part of the global company is Europe, where ArcelorMittal has about half its global work force and made 46 percent of its steel last year.

In the last quarter, Flat Carbon Europe, the business unit that supplies the automotive and appliance industries, among others, recorded a €303 million operating loss. Demand for steel in Europe is down about 30 percent from 2007 levels, the company says.

“The main problem with Europe is structural overcapacity, ” says Jeff Largey, an analyst at Macquarie in London. “The pain falls disproportionately on the biggest producer to try and right-size supply and demand.”

To try to reduce excess supply, the company has idled 9 of 25 blast furnaces in Europe, including two at Liège, Belgium, that it plans to permanently close. Analysts say the two blast furnaces at Florange are not competitive because, being inland, they are difficult to supply efficiently with raw materials like iron ore that are best suited to ship transport. And with production capacity of about two million tons a year, the Florange furnaces are too small to compete with larger plants.

Since idling the Florange furnaces 18 months ago, ArcelorMittal has been bringing slabs of semi-finished steel to the site from Dunkirk, France, a bigger and more efficient plant.

“We need to look at our operations and adapt our footprint to the new demand reality,” said Nicola Davidson, an ArcelorMittal spokeswoman. ”

ArcelorMittal apparently thinks that if it can complete the shutdowns of the four blast furnaces, it will have made important progress on reducing supply and costs. But analysts say that the outlook remains grim, unless European demand for steel rebounds.

The Élysée Palace, meanwhile, has probably not heard the last of the matter.

In his radio interview Saturday, Mr. Martin of the C.F.D.T. said the union would be vigilant about holding ArcelorMittal to its commitments. And in a not-so-veiled threat of further labor unrest, he reminded listeners how his union had created “nightmares” for Mr. Hollande’s predecessor, Nicolas Sarkozy, on the jobs issue.

“We’re on a war footing,” he said. “We're not going to let anything pass without a fight.”