Thyssenkrupp turns bearish as union resists restructuring

Last month, Tata Steel, a $100 billion business conglomerate based out of India, stated that it is still in talks with Germany’s Thyssenkrupp Ag (OTC: TYEKF) to merge its European steel operations with the latter. Considering the weakness in the steel market, both companies took a decision to enter into a strategic partnership in 2016.

However, the deal has not materialized so far due to complications in Tata Steel’s negotiation over its large pension deficit in the UK. Tata steel initially planned to sell off its European operations. However, the process came to a halt after the UK voted to exit from the EU.

The delay in the merger, and opposition from the union indicates that the stock of Thyssenkrupp, which closed at $22.61 on Tuesday, will decline further. Thyssenkrupp reported a net profit of €8 million ($8.55 million) for the fiscal 2017 first-quarter ended December 31st , 2016. This compares with a net loss of €23 million in the corresponding quarter last year. The reported net profit was below analysts’ expectations of €92 million. The adjusted earnings before interest and taxes increased 40% y-o-y to €329 million. However, the European steel division posted a 46% y-o-y decline in adjusted EBIT to €28 million.

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Considering the oversupply in the steel market, Thyssenkrupp and Tata steel (Europe) planned a merger. In fact, on April 12th , investment research firm Jefferies stated that the merger talks are in the final stages and Tata steel is currently working to segregate the pension fund from operating assets.

Earlier in April, Thyssenkrupp had announced that it would undergo a restructuring process to save up to €500 million ($530 million) in costs in the next three years. The management also announced that a portion of its heavy plate production facility would go idle. Trade unions fear that a restructuring of the European steel operations would result in a loss of as many as 4,000 jobs. The European steel operations currently employ 27,000 workers.

IG Metall, Germany’s biggest union, is totally opposed to the restructuring process. The union is of the opinion that Thyssenkrupp is creating space to accommodate ailing Tata steel plant in Port Talbot. Notably, Tata steel has entered into an agreement to protect jobs and investments in that site. IG Metall has demanded clarity on the proposed merger before venturing into any kind of restructuring process. IG Metall also believes that Thyssenkrupp would use the merger to eventually exit from the steel business in the future. However, Heinrich Hiesinger, CEO of Thyssenkrupp has clarified that the restructuring would happen irrespective of the merger deal. The standoff between the trade union and management of Thyssenkrupp is expected to keep the stock under selling pressure.

The stock is trading below the 50-day moving average of 23.50. The weakness in the stock is also indicated by the bearish crossover of the MACD indicator’s main line below the signal line. Thus, we can expect the stock to reach the next major support level of 20.

So, a put option can be purchased from a binary broker to capitalize on the probable downfall. The trader should opt for a weekly expiry, while purchasing the contract when the stock trades near $23 in the over-the- counter market.

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