Tue, 05 May 2009
Economy, Politics Halt Steel Firm's Bid to Secure Iron Ore

ArcelorMittal is suspending a potential $8 billion investment in Indonesian steelmaking facilities, amid the economic downturn and after more than a year of deadlocked negotiations.

The deal was aimed at capturing key supplies of iron ore and reducing the reliance of the company, the world's largest steelmaker by production, on big suppliers like Cia. Vale do Rio Doce SA, BHP Billiton PLC and Rio Tinto PLC. But the market for steel products has deteriorated significantly since last year, with ArcelorMittal last week reporting a first-quarter loss of $1.06 billion and saying its plants were operating at about 50% capacity. The company has cut production at plants around the world and has made efforts to slash costs.

The collapse of the plan is also a missed opportunity for Southeast Asia's largest economy at a time when it needs significant new foreign investment, analysts said.

In announcing results last week, Chief Executive Lakshmi Mittal said that the company had for now ruled out establishing steel facilities in Indonesia because there was not "enough feasibility" for projects to go ahead, including a possible investment in struggling state-owned steelmaker PT Krakatau Steel. He didn't elaborate.

In March 2008, Mr. Mittal and Indonesian President Susilo Bambang Yudhoyono discussed a plan for ArcelorMittal to take a 40% stake in Krakatau Steel and to set up a new steel plant somewhere in the country. ArcelorMittal was also to jointly invest with a state-owned miner to prospect for iron ore, nickel and manganese as part of the company's global efforts to control its supply of raw materials.

Maxi Gunawan, a co-chairman of the Indonesian British Business Council, who helped set up the meeting between Mr. Yudhoyono and Mr. Mittal, says ArcelorMittal is walking away because of complications caused by opposition to the plan by Krakatau Steel's management and Indonesia's parliament. "The momentum [for a deal] has gone," he said. "Of course [ArcelorMittal] is frustrated."

A spokesman for ArcelorMittal said the company had no comment beyond Mr. Mittal's remarks last week. Attempts to contact Krakatau Steel weren't immediately successful.

Krakatau Steel dates back 40 years, when a steel factory was set up with funding from the Soviet Union on a site overlooking Krakatau volcano off Indonesia's main island of Java. The venture struggled to get off the ground and eventually became involved in a string of corruption scandals in the 1970s. Analysts had long hoped a new round of foreign investment would bolster its operations.

Krakatau management instead pushed a plan to raise capital through an initial public offering. But that plan was shelved late last year amid declining global markets.

Opposition from management and nationalist politicians in Indonesia has stymied attempts to sell stakes in a number of state-owned companies in recent years. Nevertheless, Indonesia's economy grew 6.1% in 2008, largely thanks to high commodity prices. Now, with commodity prices in the doldrums, foreign investment will likely become more important for maintaining growth.
- Robert Guy Matthews contributed to this article.



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