Low Steel Prices Reduce ArcelorMittal’s Revenues, Yearly Guidance Intact

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Arcelor Mittal

ArcelorMittal (NYSE:MT) released its third quarter earnings on November 7. The company reported revenues of $19.64 billion, down 0.4% from $19.72 billion in Q3 2012. However, the closely watched EBITDA figure rose year-over-year to $1.7 billion from $1.45 billion. The rise in EBITDA despite marginally lower sales was due to cost saving efforts. Steel shipments rose year-over-year to 21.1 million tonnes from 19.9 million tonnes but weren’t enough to offset the impact of lower prices. ArcelorMittal reported overall net loss of $193 million compared to a loss of $652 million in Q3 2012. ((ArcelorMittal Q3 2013 6-K, SEC))

For the last few months, the company has been concentrating on reducing its debt, selling off non-core assets, idling excess production capacity and cutting costs across divisions. This is essential because all major rating agencies have downgraded its debt rating to junk, thereby increasing its cost of borrowing for capital intensive businesses.

The company has maintained its EBITDA and capital expenditure guidance for the year.

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We have a  price estimate for ArcelorMittal of $16, which is near the current market price. Our price estimate will be revised shortly as the third quarter earnings have been released.

See our full analysis for ArcelorMittal

Performance Across Major Segments

  • Flat Carbon Steel shipments in North and South America for Q3 2013 were 5.8 million tonnes, 6.5% higher than the figure in Q2 2013. This was driven primarily by higher shipment volumes from the U.S. due to the resolution of labor issues at Burns Harbor and operational incidents at Indiana Harbor East and West that impacted output in the previous quarter. Sales were $4.9 billion for Q3 2013, an increase of 2.8% compared to $4.8 billion for Q2 2013. Sales were higher due to higher shipments from the U.S. on account of issues mentioned above. This business segment contributed to around 25% of ArcelorMittal’s revenues.

  • Steel shipments from the Flat Carbon Europe segment for Q3 2013 were 6.6 million tonnes, a decrease of 6.9% compared to 7.1 million tonnes for Q2 2013. The lower steel shipments were due to a seasonally weaker period. The lower price of $803/tonne compared to the previous quarter’s price of $830/tonne bears this out. This business segment contributed to about 30% of ArcelorMittal’s revenues.

  • Steel shipments from the Long Carbon Americas and Europe segment for Q3 2013 were 5.6 million tonnes, 3% lower compared to 5.8 million tonnes for Q2 2013. The higher shipments were due to lower sales volumes in Europe on account of seasonal factors. Sales for the quarter were also lower by 5.3% at $5.1 billion compared to Q2 2013. This was on account of lower volumes and lower average steel selling prices. The share of this business segment in the company’s revenues was around 25%.

Steps To Reduce Debt And Boost Profits

Despite generating an operating income of $477 million in the third quarter, ArcelorMittal reported a net loss of $193 million. A net interest expense of $409 million on account of the company’s high debt and foreign exchange losses worth $269 million played a significant role in this.

At the end of the third quarter, ArcelorMittal’s debt rose to $17.8 billion from the previous quarter’s ending figure of $16.2 billion. This was along expected lines as the company had already informed us at the end of the second quarter that debt would rise temporarily in the latter half of the year on account of investments in working capital and dividend payouts.

The company is aiming to reduce net debt to below $15 billion in the medium term. This is the level of debt the company believes it can sustain at any point in the business cycle. This reduction is to be achieved through free cash flow generation and proceeds from M&A transactions.

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.

Outlook

ArcelorMittal claimed that it would be able to boost its profits in the remaining part of 2013 through a 1-2% rise in steel shipments, a 20% rise in iron ore shipments and benefits from asset optimization plans and management gains initiatives.

The EBITDA target has been maintained at greater than $6.5 billion due to lower demand and iron ore prices than expected. Capital expenditure target has been maintained at $3.7 billion. [1]

Despite net debt rising to $17.8 billion at end of the third quarter, it is expected to come down to around $17 billion in the fourth quarter.

The company expects demand from North America and the European Union to recover by around 40 million tonnes over the next five years. For 2013, it expects overall growth in demand of around 3.5% over the previous year. The highest growth is projected to occur in Brazil and China.

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Notes:
  1. ArcelorMittal Q3 2013 Earnings Presentation, ArcelorMittal Website []