ArcelorMittal (NYSE:MT), the world’s largest steel company, could be mulling further capacity cuts in Europe as steel demand continues to remain sluggish and is not expected to revive anytime soon. The company is aggressively trying to adjust the output at many of its steel producing plants as well as raw material resources in order to maintain profitability. In the last year, the company’s stock has plunged almost 50% as a result of oversupply of steel and weakness in demand.
Our current price estimate for ArcelorMittal stands at $22, implying a premium of about 35% to the current market price.
Steel Demand Continues to Take a Hit in Europe
Following the global economic recession in 2008, European countries have been grappling with weakness in industrial and construction activities, which are major steel demand drivers. Demand for steel in Europe has plunged to 150-160 MTPA from as high as 200 MTPA in 2008. Recently, industry lobby group, Eurofer, said the production capacity in the region is higher at 210 MTPA compared to the demand.  With the uncertain global economic outlook and a persisting debt crisis in Europe, demand is not expected to recover anytime soon. Moreover, sales in the second half of the year are lower traditionally as companies look to use up their steel inventory bought in the first half.
ArcelorMittal has shut many of its European plants due to weak demand and may have to shut more. While we expect European demand to eventually pick up 2013 onward, the current scenario may lead to a further decline in sales from Europe than we currently anticipate. Any prolonged weakness in demand would have an adverse impact on our valuation as ArcelorMittal’s European operations contribute significantly to our price estimate.
Concerns Growing for Asia Pacific Demand
While sluggish European demand is apparent, other emerging markets are also witnessing weaker demand. The recent price cut by China’s largest steel manufacturer BaoSteel could be signalling further deterioration of steel demand from China.
India has also witnessed its fourth quarter GDP slipping to a nine-year low. If weakness persists in these countries, it could lead to a downward revision in the company’s steel shipments to Asia, Africa & CIS regions, which contributes 10% to the Trefis price estimate for ArcelorMittal’s stock.Notes:
- Mittal Doesn’t See Return To Pre-Crisis Usage ‘Anytime Soon, Bloomberg, June 20 2012 [↩]