Essar Steel Algoma seeks creditor protection
Former prime minister Stephen Harper tours Essar Steel in Sault Ste. Marie, Ont., on Friday, Oct. 17, 2014. (THE CANADIAN PRESS/Adrian Wyld)
TORONTO -- Ontario-based Essar Steel Algoma Inc. filed for creditor protection on Monday as it deals with steel prices that have fallen by more than half since February.
The company has filed requests with Canadian and U.S. courts as it seeks to restructure its debt and buy enough raw materials to last through the winter. It has also raised US$200 million from a group of investors led by Deutsche Bank to fund ongoing operations.
Essar Steel Algoma, a subsidiary of India-based global conglomerate Essar Steel, is the second biggest steel producer in Canada, churning out 2.5 million tonnes of steel products per year for automakers and other manufacturers.
The company says it has roughly a $163 million shortfall between now and the end of January and needs new funding to cover its costs, which include raw materials, pension contributions, and loan and interest payments.
The Ontario Superior Court has appointed Ernst & Young as the monitor to oversee the restructuring. At the end of September, Essar Steel Algoma's outstanding liabilities totalled roughly $2.7 billion and its assets amounted to just over $2.2 billion, with $847,000 in free cash on hand.
The company's mill in Sault Ste. Marie, Ont., employs close to 3,000 people, making it the city's largest employer. Unlike most other steel mills, that plant is designed for continuous operation, but the company says that may be in jeopardy.
A pricing dispute with its suppliers has left Essar Steel Algoma low on the iron ore pellets it uses to make its steel since deliveries ceased on Oct. 5, and the company has cut production and laid off 100 full-time employees as a result.
The company says alternative suppliers are charging higher prices and can't supply the volume it needs before its most economical supply lines close for the winter.
The Sault Ste. Marie mill receives much of its iron ore supply by ship via the Great Lakes and stockpiles the pellets before ice floes make shipping impossible and leave more costly rail transport as the only option.
Without enough iron ore, the blast furnace may be shut down, which would cause "significant damage and disruption to the business," according to a filing from Ernst & Young.
The price of a metric tonne of steel billets on the London Metal Exchange peaked at US$480 in February before plummeting to US$100 in June, where it stayed until rebounding slightly to US$170 in October.
While iron ore prices have also fallen, Essar Steel Algoma says that doesn't do nearly enough to make up the difference.
In 2013, the Ontario government approved a new rule that allowed Algoma to lower its pension contributions, which the company said had become unsustainable.