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Investment Overview for ArcelorMittal (NYSE:MT)
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. We estimate margins to recover going forward and stabilize around 6% by the middle 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 remain static. This would present a downside of around 6% to the Trefis price estimate.
- Average Steel Price in Europe: ArcelorMittal's Average Price of Europe fell from $946 per metric ton in 2011 to $804 in 2013, as demand for steel fell due to an economic slowdown. We expect prices to increase modestly at 1-2% annually going forward. However, if market conditions for steel improve faster than expected and prices increase at a faster rate of 2-3%, it would present an upside of about 6% 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: NAFTA; Brazil; Africa and Commonwealth of Independent States (ACIS); and Mining. More than 35% of 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, long products including bars and rods. The firm also produces pipes and tubes for various applications.
The Brazil and Europe segments are the most valuable for the firm, each contributing more than 25% of the company's value. They are valuable for the following reasons:
The Brazil division will see a strong expansion in volumes as a result of planned capacity expansions and rising demand. This division generally enjoys strong margins, and we expect significant margin expansion throughout our forecast period.
Europe accounts for majority of ArcelorMittal's steelmaking operations. The Europe division accounts for around half of the company's revenues.
Overcapacity in the steel industry
Overcapacity in the steel industry has hit margins for many operators, as many steel mills are running at about 70% of their actual capacity. While this saves some costs, there are significant fixed costs that cause margins to compress when capacity is not optimal. This has also led to significant inventory write-downs for many manufacturers. ArcelorMittal idled capacity at some locations in Europe in order to optimize production and cut costs. As demand bounces back and capacity is optimized, we expect an increase in steel prices.
Increasing demand from emerging markets
As developing nations like China, India and Thailand witness healthy 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 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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