Higher Shipments And Prices Of Steel And Iron Ore Boost ArcelorMittal’s Quarterly Revenues

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Arcelor Mittal

ArcelorMittal (NYSE:MT) released its fourth quarter earnings on February 7. The company reported revenues of $19.85 billion, up from $19.3 billion in Q4 2012. Also, the closely watched EBITDA figure rose year-over-year to $1.9 billion from $1.56 billion. The disproportionate rise in EBITDA despite marginally higher sales was due to cost saving efforts. Steel shipments rose year-over-year to 20.9 million tonnes from 20 million tonnes and iron ore shipments rose from 6.6 million tonnes to 10.3 million tonnes. ArcelorMittal reported overall net loss of $1.2 billion compared to a loss of $3.8 billion in Q4 2012. [1]

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 also released guidance on capital expenditure and expected EBITDA for next year.

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We have a  price estimate for ArcelorMittal of $16, which represents 7% downside to the current market price. Our price estimate will be revised shortly as the fourth 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 Q4 2013 were 5.6 million tonnes, 2.5% lower than the figure in Q3 2013. This was driven primarily by lower shipment volumes in North America and a seasonal slow down in Brazil. Sales were $4.9 billion for Q4 2013, flat as compared to sales in Q3 2013. Sales were affected due to lower shipments but the impact was offset by higher average steel selling prices across all business divisions. This business segment contributed to around 25% of ArcelorMittal’s revenues.

  • Steel shipments from the Flat Carbon Europe segment for Q4 2013 were 6.7 million tonnes, an increase of 1.6% compared to 6.6 million tonnes for Q3 2013. The higher steel shipments were due to a mild pick-up in demand following the seasonally weak Q3 2013. The higher price of $816/tonne compared to the previous quarter’s price of $803/tonne also supported higher sales which rose from $6.3 billion in Q3 2013 to $6.6 billion in Q4 2013. This business segment contributed to about 30% of ArcelorMittal’s revenues.

  • Steel shipments from the Long Carbon Americas and Europe segment for Q4 2013 were 5.6 million tonnes, flat as compared to Q3 2013. The shipments were higher in the Long Carbon Europe and Tubular steel businesses but lower in the Long Carbon America business due to on account of seasonal factors. Sales for the quarter increased by 4.3% to $5.4 billion from $5.1 billion in Q3 2013. This was on account of a higher price of $866/tonne compared to $820/tonne in the previous quarter. 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 $1.2 billion for the whole year, ArcelorMittal reported a net loss of $2.5 billion. Exceptional items amounting to $1.5 billion were responsible for a majority of this loss. Some of these exceptional items included impairments worth $444 million, restructuring costs worth $552 million, charges and gains booked from associates, joint ventures and other investments worth $495 million, and the amnesty program in Brazil worth $302 million. [2]

At the end of 2013, ArcelorMittal’s debt decreased to $16 billion from the previous quarter’s ending figure of $17.8 billion. This was along expected lines as the company had already informed us at the end of the third quarter that debt would come down by the end of the year. The main components of the debt reduction during the fourth quarter were a high positive free cash flow of $1.7 billion and $0.3 billion gained from the sale of a 6.66% stake in the Turkish steel company Erdemir. [3]

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

For 2014, ArcelorMittal expects a 3% rise in steel shipments and a 15% rise in iron ore shipments. The company expects to increase iron ore production capacity to 84 million tonnes by 2015 from 49 million tonnes in 2010. We think that these are very ambitious targets. Growth in China is slowing down and we think that investment spending will decline in 2014, thus resulting in lower global steel demand. This is turn would impact steel prices and squeeze margins. As far as iron ore is concerned, we think that supply is set to exceed demand over the next 2-3 years which will depress prices. Hence, the gains from higher iron ore shipments to ArcelorMittal will be offset by lower price realizations.

The EBITDA target has been increased to $8 billion due to the above growth projections, expectations of higher iron ore prices as well as a moderate rise in steel margins. Capital expenditure target has been fixed at $3.8-4 billion, a bit higher than the 2013 actual figure of $3.5 billion. [4]

Despite net debt reducing to $16 billion at end of 2013, it is expected to in the first quarter to about $16.6 billion.

The company expects demand from North America and China to rise by 3.5-4.5% each in 2014 which we think is overly ambitious. While the target for North America looks achievable due to the economic recovery underway, we are not so sanguine about China.

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Notes:
  1. ArcelorMittal reports fourth quarter 2013 and full year 2013 results, ArcelorMittal Press Release []
  2. ArcelorMittal Q4 2013 Earnings Presentation, ArcelorMittal []
  3. ArcelorMittal Q4 2013 Earnings Conference Call, Seeking Alpha []
  4. 4Q 2013 Web Q&A, ArcelorMittal Website []