German industrial group ThyssenKrupp has bid farewell to its steel producing business in Brazil as it continues to move away from the volatile business of making steel to focus on its higher-margin capital goods unit.
ThyssenKrupp said Wednesday that it had agreed to sell its CSA steel plant in Sepetiba Bay for an enterprise value of €1.5bn, to Ternium, a steel producer with plants in Argentina, Brazil and Mexico.
Seth Rosenfeld, analyst at Jefferies, said that the deal included €1.26bn in cash and that the total value was higher than the €1bn price tag that investors had expected. The company’s share price rose nearly 5 per cent to €24.31.
Heinrich Hiesinger, chief executive of ThyssenKrupp since 2011, called the move an important milestone as the group shifts to focusing on making elevators, submarines and other goods. “We now generate over 75 per cent of our sales with our profitable capital goods and services businesses,” he said.
The German’s group’s project in Brazil dates back to 2005 when it decided to expand production there with an idea towards selling into the US.
Guido Kerkhoff, chief financial officer, said ThyssenKrupp has invested €12bn in the project over the years, but only got back €4bn, for a total loss of around €8bn. The project was not as efficient as expected, and the assumptions undergirding the investment proved to be disastrously wrong, he said.
The price of iron ore — a key steelmaking ingredient — was $30 per tonne at the time of the expansion, but with rampant demand from China the price ratcheted up to a peak of $190 in 2011. Even now, though the price of iron has halved to $85, it is still almost triple the 2005 cost.
For ThyssenKrupp, which had multiyear contracts to sell steel into the US, the higher costs of iron ore meant that the plant lost money rapidly. Many of its competitors, meanwhile, were able to reprice their contracts more often. “The underlying assumptions completely changed,” said Mr Kerkhoff.
ThyssenKrupp plans to use the cash from the deal to pay down debt. The deal is expected to be completed by the end of September, and lead to a €900m writedown.
The departure from Brazil follows the 2013 sale of ThyssenKrupp’s US steel mill to ArcelorMittal and Nippon Steel & Sumitomo Metal Corp for $1.55bn. “With the sale of CSA we are parting fully with Steel Americas,” Mr Hiesinger said.
ThyssenKrupp is in talks to join its Steel Europe unit with Tata Steel’s Dutch business, then spin the combined entity off with an initial public offering. But Tata must first find a way to separate the Netherlands from its UK business.
Meanwhile, Ternium, the Latin American steel producer, is seeking to generate more value from the Brazilian steel mills by integrating them into its supply chain. The group called the asset a “state of the art facility” that would “substantially increase its steelmaking capacity.”
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