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Investment Overview for ArcelorMittal (NYSE:MT)
WHAT HAS CHANGED?
Two major trends impacting the global and U.S. domestic steel industry, have intensified over the course of the last year, which have impacted ArcelorMittal's business prospects.
- Sharp increase in steel imports into the U.S.
- Steel imports into the U.S. have been rising sharply over the course of the last year or so. The penetration of finished steel imports as a percentage of the U.S. domestic steel market increased to 29.3% in 2015, up from 28.1% and 23.2% in 2014 and 2013, respectively. A sharp increase in Chinese steel exports and a strong U.S. Dollar have contributed to the increase in steel imports. A significant proportion of U.S. steel imports are from developing countries which have low labor costs and low overall costs of production. Domestic steelmakers contend that these imported steels are priced unfairly low and have filed antidumping petitions with U.S. trade authorities. U.S. trade authorities have imposed stringent preliminary antidumping duties on Chinese imports, with the final determination of duties expected in 2016. Competition from these low-priced imports has negatively impacted shipments and realized prices for the domestic steel industry, as well as for ArcelorMittal's NAFTA steelmaking operations.
- Weakness in Chinese demand for steel and rising steel exports
- The Chinese steel industry is currently facing weak domestic demand, primarily due to a slowing Chinese economy. However, production levels have not been adjusted in response to weakening demand conditions. As a result, the Chinese domestic steel market is currently characterized by an oversupply situation, which has provided a sharp boost to Chinese steel exports, which rose 22% year-over-year in the first eleven months of 2015. The sharp increase in Chinese steel exports has, in turn, boosted steel imports into the U.S.
Below are key drivers of ArcelorMittal's value that present opportunities for upside or downside to the current Trefis price estimate for ArcelorMittal:
The Europe division
- Europe EBITDA Margin: Margins in the Europe division declined from 4.7% in 2011 to about 3.6% in 2013, due to rising input costs and persistent weak demand. Margins recovered to 5.7% in 2014 as a result of the company's cost reduction efforts, before declining to 5.4% in 2015 due to a decline in steel prices. We estimate that margins will increase going forward and reach 7.1% towards the end of the Trefis forecast period, driven by the company's cost saving efforts and improved market conditions for steel. However, if the company is unable to realize its planned cost savings, or if market conditions deteriorate, margins may not increase as quickly as envisioned. If margins increase to 6.1% instead of 7.1% by 2022, this would present a downside of around 20% to the Trefis price estimate.
- Average Steel Price in Europe: ArcelorMittal's Average Price of steel in Europe fell from $946 per metric ton in 2011, to $609 in 2015, due to a combination of the depreciation of the Euro negatively impacting pricing in Dollar terms and weakness in demand for steel weighing on pricing. We expect prices to increase modestly at 2-3% annually going forward. However, if market conditions for steel improve faster than expected, and prices increase at a faster rate of 3-4%, it would present an upside of about 5% to the Trefis price estimate.
ArcelorMittal is currently the largest steel manufacturer in the world and was formed by the merger of steel giants Arcelor and Mittal in 2006. The company produces nearly 100 million metric tons of steel annually and has operations in 20 countries on four continents.
Headquartered in Luxembourg, the firm operates its business in five main operating segments: Brazil, Europe, NAFTA, Africa and Commonwealth of Independent States (ACIS), and Mining. More than 35% of the steel produced is in the Americas, nearly 50% in Europe, and the remainder in countries such as Kazakhstan, South Africa, and Ukraine. ArcelorMittal produces a variety of flat products such as sheets and plates, and long products including bars and rods. The firm also produces pipes and tubes for various applications.
The Europe and NAFTA segments are the most valuable for the firm, each contributing more than 30% of the company's value. They are valuable for the following reasons:
The Europe division is ArcelorMittal's largest division, accounting for the majority of the company's steel shipments. The Europe division accounts for around half of the company's revenues.
The NAFTA division is characterized by strong underlying demand, driven by improving economic conditions in the U.S. The division's shipments and pricing have been negatively impacted by competition from cheap steel imports, particularly those from China. However, with U.S. trade authorities imposing preliminary antidumping duties on steel imports from China (with final determination of duties expected in 2016), the division's shipment and pricing is expected to recover sharply over the forecast period.
Overcapacity in the steel industry
Overcapacity in the steel industry has hit margins for many operators, as steel mills globally are running at around two-thirds of their actual capacity on average. While this saves some costs, there are significant fixed costs that cause margins to compress when capacity is not optimal. As demand bounces back and capacity is optimized, we expect a recovery in margins for the likes of ArcelorMittal.
Increasing demand from emerging markets
As developing nations like China and India witness robust economic growth, the demand for steel in Asia is expected to grow at a healthy pace. This should help the steel industry solve its overcapacity issue to some extent, and allow manufacturers to eventually increase steel prices.
Economic recovery to drive demand
We expect that an economic recovery in the U.S. and Europe will drive industrial demand, which should, in turn, provide a boost to prices as well as shipments.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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