With Writedowns In The Rearview ArcelorMittal Is Set For Recovery

by Trefis Team
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ArcelorMittal
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ArcelorMittal (NYSE:MT) released its fourth quarter earnings on Wednesday, February 6. As expected, the massive $4.3 billion writedown on the European business resulted in a substantial net loss to the company. However, the demand outlook projected by the company for next year indicated that it is optimistic about economic conditions picking up slowly.

ArcelorMittal reported a quarterly net loss of $4 billion compared to a net profit of $1 billion in Q4 2011 and a net loss of $709 million in the previous quarter. The net loss for the full year stood at $3.7 billion. Revenue and EBITDA figures were also lower on a year-over-year and sequential basis with revenues of $19.3 billion and $1.3 billion of EBITDA in the fourth quarter.

The company said that there would be no further closure of plants in Europe as it is comfortable with having 16 furnaces operating in the region. In the past, it had announced the long-term idling of blast furnaces at Florange in France, various facilities at Liege in Belgium, and electric arc mills in Spain and Luxembourg as part of its asset optimization program. These actions were meant to generate approximately $1 billion in savings in order to reduce its debt burden.

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 or marginally higher across all major geographical segments. Flat Carbon Steel shipments in North and South America for Q4 2012 were 5.5 million tonnes, 3.4% higher than Q3 2012, driven primarily by higher production following completion of blast furnace maintenance work in Tubarao, Brazil. Sales, however, were $4.7 billion for Q4 2012, a decrease of 3.2% compared to $4.8 billion for Q3 2012. Sales were lower due to lower steel selling prices in North America and weak slab prices in Brazil and Mexico. This business segment contributed to around 25% of ArcelorMittal’s revenues.

Steel shipments from the Flat Carbon Europe segment for Q4 2012 were 6 million tonnes, an increase of 2.1% compared to 5.8 million tonnes for Q3 2012. The marginally higher steel shipments were due to a mild pickup in demand following the seasonally weaker summer period. However, it doesn’t mean that the demand from the region has started recovering after the sovereign debt crisis. The marginally lower price of $847/tonne compared to the previous quarter’s price of $856/tonne bears this out. This business segment contributed to about 30% of ArcelorMittal’s revenues.

Long Carbon Americas and Europe segment steel shipments for Q4 2012 were 5.5 million tonnes, essentially flat compared to 5.5 million tonnes for Q3 2012. Flat shipments were due to marginally lower volumes in Europe being offset by slightly higher North American volumes, primarily in Mexico. Sales for the quarter were also flat at $5.2 billion compared to Q3 2012. Sales were impacted by a decrease in average steel selling prices (-0.5%), which were offset by marginally higher steel shipment volumes. The share of this business segment in the company’s revenues was around 25%.

[trefis_forecast ticker="MT" driver="1216"

The weak operating performance of the company was primarily due to operating losses incurred in the Flat Carbon Europe and Long Carbon Americas and Europe business segments. The Flat Carbon Europe segment reported an operating loss of $487 per tonne while the Long Carbon Americas and Europe segment had an operating loss of $201 per tonne. Operating loss for the quarter stood at $4.9 billion primarily due to the Europe writedown. [1]

Developing Countries Could Be A Beacon Of Hope

A worldwide economic recovery will benefit steel companies including ArcelorMittal. A lot of the negative sentiment already seems to be factored into the current stock price. If ArcelorMittal faces more problems in Europe, there could be a further downside in the short and medium term. ArcelorMittal expects demand from Europe to contract by 1% next year. Until its economy recovers, we don’t see demand for steel increasing substantially in Europe even beyond 2013.

ArcelorMittal is likely to place its bets on China and other developing countries, which are expanding and urbanizing at a rapid pace. According to ArcelorMittal’s presentation at the Macquarie conference compounded annual growth rate (CAGR) for steel stood at 5.6% between 2000 and 2010 in developing countries (excluding China). The 2-3% growth in demand that ArcelorMittal anticipates for 2013 is likely to come from North America and Asia. [2]

We have a price estimate for ArcelorMittal of $15, which we will soon revise to incorporate the fourth quarter earnings results.

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Notes:
  1. ArcelorMittal 6-K Filing, SEC []
  2. ArcelorMittal Sees ‘Positive Indicators’ Despite Widening Losses, WSJ []
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