EuroBusiness Media (EBM): Arcelor, one of the world's leading steel companies, just reported earnings for the third quarter of 2005. Guy Dollé, welcome.
Guy Dollé (GD): Welcome.
EBM: You are the CEO of Arcelor, what are your comments on the company's performance in the third quarter?
GD: Firstly, you have to be aware that the market was very difficult in the third quarter. A lot of destocking, spot prices under pressure and despite that, we have been able to deliver an EBITDA of € 1.1 billion, including €100 million of positive EBITDA due to the disposal of our activity in Spain. So why this good result: because of our commercial policy - price before volume-, because of our flexibility, especially in long carbon steel, also because of our product mix, of our split shares between contract and spot prices and also because of our exposure to Latin America, where the results have been very good.
EBM: How is your expansion in Latin America coming along, in particular what is the calendar for the simplification of your Brazilian holding structure?
GD: We are in line with what we announced at the end of July : Arcelor do Brasil will exist and will own 100% of our flat carbon steel CST and long carbon steel Belgo Mineira on November 13th. Depending on the choice of our shareholders - who will opt either for shares or for cash - our stake in Arcelor do Brasil will be between 65% and 75%. I can also confirm that during the last few weeks we reached an agreement with the pension funds regarding the voting shares of Acesita, which means that we will now have the majority of the voting shares and we will be in a position to fully consolidate Acesita in our P&L for the fourth quarter this year. I would just like to remind you that Acesita is certainly the world's most efficient stainless steel company.
EBM: Markets expect you to be acquisitive in the coming months now that you have restructured and reduced your debt. What can you tell us about your strategy for external growth?
GD: We have the financial resources to grow. We have the management to grow, we also have the expertise to manage new assets and I think we have shown that in Brazil. We just have to ask ourselves if there is a new paradigm in the steel industry. If we have a look at the last three major acquisitions - Hylsa in Mexico, the privatisation of Erdemir in Turkey, the privatisation of Krivoy Rog in the Ukraine - the multiples paid by the companies acquiring these assets are very high, more or less twice as high as usual. So we have to ask ourselves, will it last in the future, or will it change, depending on the cycle ? And if it lasts, we must ask ourselves, is it still interesting to acquire existing assets when it is more expensive than buying new clients ? It's important for the future of this business, not just Arcelor. We still have, of course, as I have already mentioned, some growth prospects. Everybody knows that we are having discussions in China. I will not elaborate on that. And we still have other projects that I don't want to discuss before we have reached a solution.
EBM: It has been said that the Krivorozhstal acquisition in the Ukraine was much too expensive. What is your point of view exactly on this issue?
GD: What is very interesting is that some proposals were made 18 months ago for between $800 million and $1.5 billion for 93%, whereas this asset was sold at $4.8 billion for 93%. So I think its very, very expensive. In our case, we were interested, it could have been a good solution for Arcelor, but we gave priority, as always, to value creation for our shareholders rather than just growth in volume.
EBM: What is your outlook for steel prices in 2006?
GD: First the outlook for the fourth quarter of this year: after the trough reached for spot prices for flat carbon steel in September, we have been in a position to increase prices a little bit, between €10 and €40, depending on whether we are in the North or South of Europe. The market is reacting well, so I believe that for next year, where apparent demand will be more or less in line with final demand - which means that there will be much more shipments for everybody in Europe including Arcelor - there is still the possibility of a small price increase for spot prices in the first quarter, which means that these prices will not reach the top level they had in the second quarter this year. For long car bon steel, the margin will remain more or less stable, taking advantage of the volatility of scrap. For next year I am much more pessimistic for stainless steel.
EBM: CVRD is calling for a 40% increase in the price of iron ore. Is this realistic? What is the point of view of the steel producer in this negotiation?
GD: I was not aware of this 40% figure. I would just like to remind you of the arguments of iron ore companies regarding 2005 contracts. They explained that spot prices, especially in flat carbon steel had soared and that this had to be passed on to iron ore. That was the argument they gave for the 71% price increase. Everywhere in the world, in Asia, Europe and the US, spot prices started to decrease at the end of the second quarter. If we use the same argument as just a couple of quarters ago, the iron ore price next year will decrease. It's not so simple of course, it will depend mainly on the demand in China. I do believe that there will still be some growth in steel demand in China, but less than over the past few years, so my favourite scenario is that of stability for iron ore.
EBM: And finally what is your guidance for 2006?
GD: Regarding volume and especially in Europe, 2006 will be much better because apparent demand will increase due to the beginning of the build-up of inventories. I think that we will see some price increases in the first quarter, which means that in fact it will be a mid-cycle year, in my opinion perhaps close even to the top. If we bear in mind what we have been able to achieve in this third quarter, €1 billion of recurring EBITDA, in very difficult conditions - we expect that it was close to the trough - that means that we will be able to achieve, in a mid-cycle year, more than €4 billion EBITDA, much more than our cost of capital. So I think this is really important news for our shareholders : the new Arcelor, after what has been achieved during the three year integration period, after our optimisation of product mix and after, of course, our takeover in Brazil, the new Arcelor is much more efficient than the previous one.
EBM: Guy Dollé, CEO of Arcelor, thank you very much.
GD: Thank you.
