China’s Weakness Continues To Pummel ArcelorMittal

by Trefis Team
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ArcelorMittal
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ArcelorMittal (NYSE:MT) released its third quarter earnings on Wednesday, October 31. It reported a net loss of $709 million compared to a net profit of $659 million in Q3 2011 and a net profit of $959 million in the previous quarter. Revenue and EBITDA figures were also lower on a year-over-year and sequential basis with revenues of $19.7 billion and $1.3 billion of EBITDA. The company’s weak performance has been attributed primarily to a slowdown occurring in China at a time when global economic conditions are already quite fragile.

The difficult operating conditions are expected to continue in the fourth quarter as well. Therefore, while we think that long term prospects for the company are good in event of an eventual economic recovery, near term headwinds are not expected to subside soon. For now, ArcelorMittal will be concentrating on asset optimization, net debt reduction and productivity and efficiency improvements. [1]

ArcelorMittal is the world’s leading steel and mining company with a presence in more than 60 countries. It is the leader in all major global carbon steel markets, including automotive, construction, household appliances and packaging. The company also has a world class mining business with a global portfolio of over 20 mines in operation and development, and is the world’s fourth largest iron ore producer. With operations in over 22 countries spanning four continents, the company covers all of the key industrial markets, from emerging to mature and has outstanding distribution networks.

See our full analysis for ArcelorMittal

Weak Performance Across All Segments

Steel shipments were lower across all major geographical segments. Flat Carbon Steel shipments in North and South America for Q3 2012 were 5.4 million tonnes, 6.7% lower than Q2 2012, driven primarily by lower slab availability in Brazil following blast furnace maintenance work in Tubarao, Brazil. Sales in the Flat Carbon Americas segment were $4.8 billion for Q3 2012, a decrease of 9.7% as compared to $5.4 billion for Q2 2012. Sales were lower due to lower steel selling prices in North America, weakening slab pricing and lower dollar prices in South America due to depreciation of Brazilian Real. This business segment contributed to around 25% of ArcelorMittal’s revenues.

Steel shipments from the Flat Carbon Europe segment for Q3 2012 were 5.8 million tonnes, a decrease of 13.8% as compared to 6.8 million tonnes for Q2 2012. Lower steel shipments were due to significantly weaker market demand and seasonal slowdown. The weaker market demand is understandable given the dire economic straits in which the region finds itself owing to the sovereign debt crisis. This business segment contributed to about 30% of ArcelorMittal’s revenues.

Long Carbon Americas and Europe segment steel shipments for Q3 2012 were 5.5 million tonnes, a decrease of 5.7% as compared to 5.8 million tonnes for Q2 2012. Lower shipments were due to a seasonal slowdown in Europe and weaker demand in North America. Sales for the quarter were lower at $5.2 billion, as compared to $5.7 billion for Q2 2012. Sales were impacted by a decrease in steel shipment volumes and by lower average steel selling prices. The share of this business segment in the company’s revenues was around 25%.
The weak operating performance of the company was primarily due to operating losses incurred in the Flat Carbon Europe and Asia Africa and CIS (AACIS) business segments. The Flat Carbon Europe segment reported an operating loss of $66 per tonne while the AACIS segment had an operating loss of $27 per tonne. Operating loss for the quarter stood at $49 million. Operating results for the quarter were also negatively impacted by a $72 million one-time charge related to signing bonus and post retirement benefit costs following ArcelorMittal’s entry into the new U.S. labor contract. [2]

Short Term Plans

The debt in Q3 2012 increased by $1.2 billion due to an impact from negative operating cash flow and unfavorable  foreign exchange rates. This was partially offset by proceeds from asset disposal and an issuance of perpetual securities. The increase in debt is a concern for ArcelorMittal since its rating was downgraded earlier this year primarily due to high leverage. The company is targeting investment grade rating hence has proposed reducing dividend payment next year. Its expansion plans in Canada for the first half of 2013 remain on track.

Outlook For The Long Term

An economic recovery in the long term should benefit steel companies, including ArcelorMittal. A lot of the negative sentiment already seems to be factored into the current stock price. Until the economy recovers, we don’t see the demand for steel increasing substantially.

We have a price estimate for ArcelorMittal of $18, which is 15% ahead of the market price. We will be revising our model shortly in light of the recent earnings results.

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Notes:
  1. ArcelorMittal reports third quarter 2012 and nine months 2012 results, ArcelorMittal Press Release []
  2. ArcelorMittal 6-K Filing, SEC []
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