ArcelorMittal: Wage Hikes Hurt Mining Margin; Defers Brazil Expansion

by Trefis Team
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Trefis
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ArcelorMittal
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Steel manufacturer ArcelorMittal (NYSE:MT) has finally agreed to raise wages for miners working at its mine in Temirtau, Kazakhstan. [1] Additionally, the subdued environment in the steel demand in Brazil has forced ArcelorMittal to suspend its $1.5 billion expansion of its long carbon steel and flat carbon steel facilities in Brazil [2]

Our price estimate for ArcelorMittal stands at $22, implying a premium of about 50% to the current market price.

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Margins Affected

ArcelorMittal Temirtau, ArcelorMittal’s arm in Kazakhstan has finally planned to raise wages for its miners to meet inflationary needs in the country. This happened in response to a rally held in Temirtau city by miners to raise wages. The rise in wages could be in the range of 7-8% of the present levels. This will have an impact on EBITDA margin for ArcelorMittal Mining division as employee expenses will rise. The margins in mining are usually impacted by primarily two factors – pricing pressure due to oversupply and rising labor and energy costs. The company’s worries are exacerbating as the former factor is also going against it. Steel and iron ore shipments have dropped as the export markets are gloomy amid crisis in Europe. As a result, ArcelorMittal is facing depressed steel product pricing due to stiff competition.

Deferred Brazil Expansion

ArcelorMittal Brasil, the Brazilian unit of ArcelorMittal, has deferred a $1.5 billion expansion plan in the country as it encountered lack of demand. The plan included $1.2 billion long carbon steel expansion in Monlevade and a $300 million flat carbon steel expansion in Vega do Sul. This will impact two separate divisions of ArcelorMittal – Long Carbon Steel Americas and Europe & Flat Carbon Steel Americas, which will face delay in future capacity addition as against what was anticipated.

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Notes:
  1. ArcelorMittal Temirtau to raise wages by 7pct, steelguru.com, May 22, 2012 []
  2. ArcelorMittal suspends $1.5 bln Brazil expansion, reuters.com, May 21, 2012 []
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