Low Steel Prices Will Weigh On ArcelorMittal’s Revenues

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ArcelorMittal (NYSE:MT) will release its third quarter earnings on November 7. We expect weaker revenues from the steel business on a sequential and annual basis due to lower steel prices. However, steel shipments may be higher on a revival in demand due to an economic recovery. The company also has an iron ore business which may generate higher year-over-year revenues due to higher prices this year. Overall revenues will be determined by the sum of Arcelor’s steel and iron ore revenues, and higher revenues from the latter may or may not offset lower revenues from the former.

ArcelorMittal has stated that it aims to increase EBITDA/tonne of steel substantially over the next 2-3 years. We may see some positive impact of this strategy in the company’s profit figures.

We have a  price estimate for ArcelorMittal of $16, which is near the current market price. Our price estimate will be revised once the earnings results are out.

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See our full analysis for ArcelorMittal

Iron Ore Prices And Steel Prices

Iron ore prices in the third quarter were higher than expected because the sentiment about China’s economy was buoyant, defying previous expectations. The production of steel surged due to the stimulus aimed at stabilizing the country’s economy. Since inventories of iron ore were low, increased demand from the steel industry triggered a rise in demand for iron ore. ArcelorMittal has a robust iron ore mining business which will definitely report higher year-over-year revenues as a result of the price rise observed. [1]

The data on the London Metal Exchange (LME) shows that steel billet prices fell steeply year-over-year for the third quarter. Therefore, we expect lower price realizations for ArcelorMittal in its steel business which will impact revenues negatively. This may be offset to some extent by higher steel shipments due to a recovery in the U.S. economy and sustained demand from China. The monetary stimulus by the Chinese government has resulted in higher construction activity and thus higher demand for steel. ((Steel Billet Prices, LME))

Steps To Reduce Debt And Boost Profits

Paring its debt burden is a high priority area for ArcelorMittal in order to regain its investment grade rating which has been downgraded to junk by major rating agencies. At the end of the second quarter this year, ArcelorMittal had a net debt of $16.2 billion on its balance sheet. The company is aiming to reduce net debt to below $15 billion in the medium term. Despite net debt having come down in the second quarter, ArcelorMittal said that it will register an increase in the second half of the year due to an expected investment in working capital and payment of the annual dividend. Still, the medium term debt target of $15 billion remains unchanged.

In order to reduce debt, ArcelorMittal has also been actively exploring the sale of non-core assets. In October, it sold a partial stake of 6.66% in Erdemir, Turkey’s largest flat steel producer, to institutional investors. This transaction has brought down ArcelorMittal’s stake in Erdemir to 12.08% from 18.74% and generated $267 million in cash. [2]

ArcelorMittal has set itself an ambitious target of raising EBITDA per tonne of steel from $87 to $150 in the next 2-3 years. This is expected to be achieved through a combination of asset optimization, an increase in shipments, growth in the mining business, management gains and higher utilization rates at its facilities. We will find out if the company has made any progress on this front when it releases its quarterly results. Substantial progress on this front will get reflected in ArcelorMittal’s results by way of lower costs and higher EBITDA and profits. [3]

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Notes:
  1. Iron Ore Spot Price Chart, YCharts []
  2. ArcelorMittal Sells Partial Stake In Turkish Steel Company As Part Of Deleveraging, Trefis []
  3. ArcelorMittal Q2 2013 Earnings Presentation, ArcelorMittal Website []