S&P Downgrade of Steelmaker ArcelorMittal to Junk Status signals Continued World Depression

Yesterday, Thursday August 2nd, the ratings agency Standard & Poor’s (S&P) downgraded the stock of the world’s largest steel producing company, ArcelorMittal, basing their new rating on the continued contraction of the Eurozone economies.  This action heralds at least 2 more years of the capitalist world’s economic depression; this is obviously more bad news for the working class.  We have put up with this chaotic capitalist system long enough – it is long past time that the world’s working class rid the world of this insane, greed-based economic system!

ArcelorMittal is one of the world’s largest corporations, comprising operations in everything related to the production of steel, from coal and iron ore mines to smelting furnaces.  Based in Luxembourg and with a great deal of their steelmaking capacity located in Europe, ArcelorMittal has higher production costs than many of its chief competitors, particularly China.  The sudden downturn in commodities prices, particularly metals, heavily influenced by declines in demand from previously booming economies like China and Brazil has caught the capitalist world by surprise and has caused ratings agencies like S&P to make a 180-degree reversal of their previous outlook on the world economy.  Due to the complete reversal of all their previous economic forecasts, this corporate behemoth has suddenly had to slam on the brakes and halt its investments in new mines and production facilities.  Arcelor has been forced to shut down 9 of its 25 European steel smelting plants, throwing thousands of people out of work.

Other mining companies have done the same, throwing their corporate gears from “full speed ahead” into “full reverse” in a desperate effort to prevent the loss of billions of dollars in “suddenly gone bad” investments in new mines, power plants and production facilities.  AngloAmerican PLC has announced that it will cut capital spending in 2012 by 21%; Vale SA, stung by a 60% drop in profits in the second quarter of this year is said to be now “reviewing” its investment plans: what that means in plain English is they have thrown them in the garbage and are revising everything from top to bottom.

Metals prices dropped 24% last year – they have declined another 9% so far this year.  And recent announcements by China that their economy is slowing down in the face of declines in demand from Europe and the rest of the capitalist world has caused retrenchment all down the line across the globe.

Even as recently as this past May, Standard & Poor’s had reaffirmed Arcelor’s just-above-junk “‘BBB-‘ rating”:

“PARIS (Standard & Poor’s) May 31, 2012–Standard & Poor’s Ratings Services said today it affirmed its ‘BBB-/A-3’ long- and short-term corporate credit ratings on Luxembourg-registered steel group ArcelorMittal and its guaranteed
subsidiaries. The outlook is negative.
“The affirmation reflects our expectation that ArcelorMittal will be able to deleverage to bring its fully adjusted ratio of funds from operations (FFO) to debt to 25% by mid-2013, which we believe is commensurate with our ‘BBB-‘ rating…

“Our scenario reflects our view that profitability in the global steel industry, and especially in Europe, to which ArcelorMittal is very exposed, will remain weak compared with 2007-2008 because of overcapacity. Our forecast for 2012 and 2013 is, however, substantially above annualized EBITDA for the last six months of $6.7 billion,
because we believe the last six months represented the bottom of the cycle with substantial destocking along the supply chain in the fourth quarter of 2011. We expect that volumes, capacity utilization, and profits will improve from the second quarter of 2012 and be underpinned by stronger economic growth in Europe at the end of the year. We also anticipate that the asset optimization program the group is currently implementing will have a
moderately positive effect on profits in 2013.” [Source: S&P: “Steel Group ArcelorMittal Ratings Affirmed At ‘BBB-/A-3’; Outlook Negative”, 31 May, 2012]

It’s just the latest example of the fact that, under capitalism – an economic system under which anarchy in production prevails and where no one has control of the world’s economy – analysts and business planners are forced to constantly make educated guesses as to what will happen next in the world economy.  S&P was forced to dramatically change it’s assessment of the world economy in just the space of 2 months:

“Standard & Poor’s Ratings Services said today it lowered its long- and short-term corporate credit ratings on Luxembourg-registered steel group ArcelorMittal to ‘BB+/B’ from ‘BBB-/A-3’.  The outlook is negative…

“The downgrade reflects the weaker steel industry environment and economic prospects globally, and particularly in Europe, that have led us to revise downward our forecast for ArcelorMittal’s profits for the rest of 2012 and

“Our rating action follows the recent change in Standard & Poor’s economic forecast for Europe (see ‘The Curse Of The Three Ds: Triple Deleveraging Drags Europe Deeper Into Recession,’ published on July 30, 2012, on RatingsDirect).
In addition, purchasing manager indices for other parts of the world have weakened, which we believe should translate into lower steel demand in 2012-2013. Furthermore, the 20% decline in steel and raw material prices over
the past two months indicates that the industry environment is currently weaker than we previously expected…

“We now expect that the company’s adjusted ratio of funds from operations (FFO) to debt will be below 20% in 2012 and about 20% in 2013 according to our scenario, compared with our previous forecast of 25% in 2013. This is in spite
of our continued assumption that management will likely undertake significant debt reduction over the next six months through disposals and potentially other significant credit-enhancing measures.

“Our ratings on ArcelorMittal now factor in our expectation that the company’s adjusted EBITDA will be below $7 billion in 2012, following a weak $3.5 billion in the first half and a likely more challenging second half than we
previously assumed.”  [Source: S&P: “Steel Group ArcelorMittal Ratings Lowered To ‘BB+/B’ On Weaker Industry Prospects; Outlook Negative”, 2 August, 2012]

This is what you call economic whiplash from the rapid decline of the prospects of the European economy.  That S&P could be so far off target in their previous attempt to “poss the impossible” by predicting the future course of a capitalist world economy shows that it is impossible to do.  It is especially when you need clear analysis most – at times like this, of economic crisis in the capitalist system globally – that your ability to see even two months into the future is swept away.  This is why we call for the gradual abolition of the capitalist system and its replacement with a democratically controlled, planned socialist economy.  The 7 billion inhabitants of Planet Earth can not have their lives resting in the balance of a crazy, out-of-control system like capitalism.  It makes planning for your own and your children’s futures IMPOSSIBLE!  These wrenching whipsawing up-and-down cycles of capitalism in times of crisis lead to the complete destruction of people’s lives, driving food, energy, raw materials prices up one day and down another, making rational planning impossible and causing global poverty, unemployment and even starvation.

The workers of the world who maintain their tragically misbegotten allegiance to the capitalist system are going to pay a very high price for sticking with an economic system that is fundamentally based on the brutal exploitation of the working class.  Our brothers and sisters all over the globe, and we ourselves, will be suffering with higher unemployment, increased poverty, all the miseries of a major economic crisis from starvation to war, all because of their futile misplaced faith in the capitalist system.

Wake up, brothers and sisters!  The capitalist system is a death trap for the human race!  We must build working class political parties to lead the way out of the dead end of capitalism and into a much more reliable and stable economic future under a democratic socialist workers government.  Time is not on our side!

[Sources: Standard & Poor’s, The Wall St. Journal, Wikipedia]



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