What happened
Shares of international steelmaking giant ArcelorMittal (MT -2.40%) closed Friday, trading down 8.9% after announcing that it will "idle its steelmaking operations in Kryvyi Rih, Ukraine in order to ensure the safety and security of our people and assets."
So what
Arcelor said that it had already been "evaluating the situation on a daily basis," however, and that "production had previously been reduced with the plant operating at a technical minimum (approximately one-third of its normal production levels)." So today's closure announcement is actually functionally equivalent to Arcelor saying "we're reducing output by one-third of capacity".
Does that justify a near-9% haircut to Arcelor's stock price, though?
Actually, it might.
Consider: According to Arcelor's website, the Kryvyi Rih factory has a crude steel production capacity of 6.3 million tons, making it Arcelor's second-largest steel foundry in the world. That being said, we now know that it was actually producing only about 2.1 million tons at the time it was closed and, relative to the company's total manufacturing capacity around the world of 73.1 million tons, today's announcement actually only reduces total output at the company by about 2.9%.
Image source: Getty Images.
Now what
That's the argument for why today's sell-off might be an overreaction. Now here's the argument for why it might be an entirely logical reaction:
If investors had hoped that the situation in Ukraine would quickly resolve itself and were betting on Kryvyi Rih quickly returning to full production, well, the fact that the factory is now shut down does remove about 8.6% of Arcelor's total global capacity from production, and perhaps permanently.
Viewed in that light, I could see an argument for reducing Arcelor's market capitalization by 8.6% this week, and today's 8.9% sell-off isn't far off from that. Long story short, I see today's sell-off as more or less appropriate.
