London: ArcelorMittal and Vale, two of the largest metals groups, have been forced to make writedowns adding up to a combined $8.5 billion amid weak economic conditions in Europe.
ArcelorMittal, the world’s biggest steelmaker by sales, on Friday said it would have to take a goodwill impairment charge of about $4.3 billion in its fourth-quarter accounts.
The company, which is led by Indian billionaire Lakshmi Mittal and has just resolved a bitter dispute with the French government over the future of one of its plants, blamed a “weaker macroeconomic and market environment in Europe”. Steel demand in Europe had fallen 8 per cent this year, it said, bringing the cumulative decline since 2007 to 29 per cent. Europe accounted for almost half of ArcelorMittal’s total steel output last year.
“This weaker demand environment, and expectations that it will persist over the near and medium term, led to a downward revision of cash flow expectations underlying the valuation of the European businesses,” said ArcelorMittal.
In the first nine months of this year, ArcelorMittal’s main European plants accounted for a cumulative operating loss of $823 million.
Meanwhile, Vale, the world’s second-largest mining company by market value, announced late on Thursday that it was taking $4.2 billion in writedowns linked to its ferronickel business in Brazil and aluminium assets in Europe.
The company said that the impairment reflected the “current market environment for ferronickel” and the need to rebuild a furnace at its Onca Puma mine and processing plant in Brazil.
It added that the “downward volatility” of aluminium prices and macroeconomic uncertainties in Europe had forced it to write down part of the value of its 22 per cent stake in Hydro, the Norwegian aluminium producer.
The moves could herald a round of writedowns and impairments by the world’s largest mining and metals groups as they grapple with an ailing outlook for some key commodities, weighing on asset valuations.
This year has also seen the sector’s profitability squeezed by falling prices and rising costs, with large miners such as BHP Billiton, Rio Tinto and Anglo American pruning their asset portfolios.
Shares in ArcelorMittal fell 2.5 per cent to€12.87 in late trade on Friday. They have fallen 6 per cent over the past year but were worth more than €60 in 2008 before the downturn in the steel sector.
Goodwill is the optimistic asset that is created when the price of an acquisition exceeds the value of the target’s net identifiable assets.
The International Financial Reporting Standards accounting rules followed by listed companies in the EU require an annual test to see if the previously stated value is still justified by the company’s expectations of future performance.
ArcelorMittal said it had $12.4 billion of goodwill on its balance sheet before the writedown, chiefly arising from the €26.9 billion contested acquisition of Arcelor, a European steelmaker, by Mittal Steel in 2006.
Goodwill impairments at large listed European companies rose to €76 billion in 2011 as executives were forced to revisit upbeat projections underpinning past acquisitions, according to research by Houlihan Lokey, the US investment bank.