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Investment Overview for ArcelorMittal (NYSE:MT)
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Below are key drivers of ArcelorMittal's value that present opportunities for upside or downside to the current Trefis price estimate for ArcelorMittal:
Long Carbon Steel Americas and Europe division
- Flat Carbon Europe EBITDA Margin: Margins in the Flat Carbon Europe division declined from 16.4% in 2008 to about 5% in 2011 due to rising input costs and persistent weak demand in Europe. The EBITDA margin in 2012 has dropped drastically due to lower demand and prices and was 4.4% at the end of the third quarter. We estimate margins to recover going forward and reach 9% by the end of the Trefis forecast period. The company has idled capacity in response to challenging market conditions. However if the idled capacity doesn't save sufficient costs and a recovery in demand is more gradual, margins could remain stuck at 5%. This would present a downside of 15% to the Trefis price estimate.
- Average Price per Ton for Long Carbon Steel Americas & Europe: ArcelorMittal's Average Price of Long Carbon Steel in Americas & Europe rose from $922 per metric ton in 2010 to $1054 in 2011 as demand for Oil Country Tubular Goods (OCTG) increased with an increase in oil exploration. We expect prices to increase modestly at about 1% annually going forward. However if greater demand from the oil and gas industry causes prices to increase by 3% annually it would present an upside of about 7% to the Trefis price estimate.
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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: Flat Carbon Americas; Flat Carbon Europe; Long Carbon Americas and Europe; Asia, Africa and Commonwealth of Independent States (CIS) (AACIS); and ArcelorMittal Steel Solutions and services. 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.
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The Flat Rolled Europe, Flat Rolled Americas, Long Carbon Americas and Europe segments are the most valuable for the firm, each contributing more than 20% of the company's value, for the following reasons:
Strong growth in volumes and strong margins
The Long Carbon Americas and Europe division sold 23.1 million metric tons in 2010 nearly 24 million metric tons in 2011. The division generally enjoys strong margins, and we expect significant margin expansion throughout our forecast period.
Eventual demand recovery in the Americas
While shipments and prices have recovered somewhat in the Americas, we expect that as economic conditions eventually recover we will see demand bounce back significantly. This should help shipments, prices and margins.
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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.
Eventual economic recovery to drive demand
While demand remains relatively strong in emerging markets, steel is generally sold at spot prices which makes it vulnerable to global economic conditions. We expect that an eventual recovery in the U.S. and Europe will drive industrial demand which should in turn provide a boost to prices as well as shipments.
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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.
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