ArcelorMittal (NYSE:MT) will release its fourth quarter earnings on February 7. We expect better sequential results as we think that steel shipments will show marginal improvement, iron ore shipments will register significant growth and savings will be realized from asset optimization plans. Also, higher iron ore prices in the fourth quarter may result in higher overall year-over-year revenues. Overall revenues will be determined by the sum of Arcelor’s steel and iron ore revenues.
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.
Iron Ore Prices And Steel Prices
Iron ore prices in the fourth 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. 
The data on the London Metal Exchange (LME) shows that steel billet prices rose all through the fourth quarter but were still lower as compared to Q4 2012. Therefore, we expect lower year-over-year 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 third quarter this year, ArcelorMittal had a net debt of $17.8 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 risen in the third quarter, ArcelorMittal had said at the end of Q3 that it would register a decrease in the fourth quarter and come down to $17 billion.
Notable Business Developments
ArcelorMittal entered into a 50-50 joint venture partnership with Nippon Steel & Sumitomo Metal Corporation to acquire 100% of ThyssenKrupp Steel USA from ThyssenKrupp for a price of $1.55 billion. The plant is a new, state-of-the-art facility with a production capacity of 5.3 million tonnes including hot rolling, cold rolling, coating and finishing lines. ArcelorMittal is targeting the automotive and oil and gas industries as end users for the plant’s output. Its current facilities in the U.S. have a high capacity utilization rate for the automotive market and the company is betting on a significant rise in automobile production going forward. Also, with oil and gas exploration and production surging, demand from this segment is expected to be robust as well. 
What We Will Watch Out For
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 are keen to 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. ((ArcelorMittal Q3 2013 Earnings Presentation, ArcelorMittal Website))Notes:
- Iron Ore Spot Price Chart, YCharts [↩]
- ArcelorMittal acquires ThyssenKrupp Steel USA with Nippon Steel & Sumitomo Metal Corporation for US$1,550 million, ArcelorMittal Press Release [↩]