ArcelorMittal (NYSE:MT) will announce its first quarter results on May 9. Higher steel prices complemented by the company’s asset optimization and cost savings programs will boost quarterly results year-over-year. Lower iron ore prices on one hand will lower input costs for the company’s steelmaking operations. However, these will also negatively affect the results from the sale of iron ore to third parties. The impact of lower iron ore prices will be partially offset by higher shipment volumes.
The company is expected to maintain its commitment to debt reduction and meeting its medium- term target for net debt. The divestment of ArcelorMittal’s stake in ATIC, announced on April 30, is consistent with its policy of selective divestment of non-core assets.
You can check out our complete analysis for Arcelor Mittal here:
Steel Prices And Volumes
ArcelorMittal is likely to report higher year-over-year realized steel prices in the first quarter. This is primarily driven by a better pricing environment for steel this quarter as compared to the corresponding period a year ago. This is reflected in London Metal Exchange (LME) steel billet spot prices. These prices ranged between $200-300 per tonne in Q1 2013. However, they were above $350 per tonne for most of Q1 2014. 
Growth in steel demand in 2014 is expected to result in a rise in steel shipments. Growth in shipment volumes will be driven by an economic recovery in the developed economies. In the U.S., rising demand from industrial equipment, automotive and construction sectors are expected to drive volumes. The recovery in the Eurozone manufacturing sector, which accelerated towards the second half of 2013, is expected to continue at a modest pace in 2014. The Eurozone Manufacturing Purchasing Managers Index (PMI) measures business conditions in the Eurozone manufacturing sector. This metric registered an average value of 53.4 over the first quarter. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction in business activity. Growth has picked up particularly in Germany, Netherlands, Italy and Ireland. This will benefit ArcelorMittal’s European operations. Chinese demand for steel is expected to grow only at a modest pace in the first quarter. A slowdown in investment and factory output in the first quarter of the year is expected to have tempered demand Chinese demand for steel.((Markit Eurozone Manufacturing PMI, Markit Economics Press Relase))
Iron Ore Prices And Volumes
Iron ore produced by the company’s mining segment is mainly used by the steel making segment of the company as a raw material for manufacturing steel. Some of the iron ore produced by the mining operations is also sold directly to third parties. Thus, a decrease in iron ore prices has mixed results for the company. On one hand it reduces input costs for the steel making segment. On the other hand, it reduces revenues through sales to third parties. Iron ore prices have fallen in Q1 2014 as compared to the corresponding period a year ago.((Iron Ore Spot Price Chart, YCharts))
International iron ore prices are largely determined by Chinese demand as China is the largest consumer of iron ore in the world. Flagging demand for iron ore from China in the wake of an economic slowdown has put downward pressure on iron ore prices. According to data from China’s National Bureau of Statistics, growth in investment, factory output and retail sales has slowed to multi-year lows in the first two months of the year. A Chinese government crackdown on polluting steel plants has forced many of them to shut down. In addition, the tightening of credit by Chinese banks to steel plants that are not performing well will affect their ability to purchase iron ore and thus the overall demand for it. This has resulted in an inventory build-up at Chinese ports which will further curtail imports. Furthermore, the Chinese leadership has proposed structural reforms of the economy, shifting the emphasis from an investment and export driven growth to services and consumption led growth. Such a transformation of the Chinese economy may negatively impact Chinese demand for iron ore in the long run. 
On the supply side, iron ore majors such as Rio Tinto, BHP Billiton have expanded production of the ore. These companies are banking on higher volumes to compensate for lower prices and drive profits given their low costs of production of iron ore. These companies are betting on continued strength in iron ore demand over the long term. The main drivers of such long-term demand are increasing levels of urbanization and industrialization in developing and emerging economies, particularly China and India. However, given the weak demand scenario at least in the near term, expanded production by iron ore majors has resulted in an oversupply situation which is expected to keep prices subdued in the near term. 
Iron ore shipment volumes are expected to rise due to a planned expansion in production. This is mainly due to the ramp up of capacity at the company’s Canadian and Liberian iron ore mining operations. Shipment volumes in 2014 are expected to rise to 84 million tonnes from 70 million tonnes in 2013. A rise in shipment volumes will partially offset the negative impact of lower prices on iron ore sales.((ArcelorMittal’s Q4 2013 Earnings Conference Call Transcript, Seeking Alpha))
The company’s cost optimization efforts yielded savings of $1.1 billion in 2013. The company is set to continue with its emphasis on reducing costs with $ 2 billion and $ 3 billion in savings targeted in 2014 and 2015 respectively. 
The company is focused on achieving its net debt target of $15 billion in the medium term. However, in Q1 net debt is expected to rise due to investments in working capital and the acquisition of Thyssenkrupp’s Alabama steel plant. The drive to lower its debt burden is mainly because of a ratings downgrade for Arcelor Mittal by major rating agencies, which has made raising capital costlier for the company. The company has selectively been divesting non-core assets in order to reduce its debt burden. The announcement of Arcelor Mittal’s plan to divest its stake in ATIC Services, a European port handling and logistics company, is consistent with this strategy. The transaction is expected to be completed in June 2014. 
What To Look Out For
We will like to hear whether the company’s management maintains its volume and price expectations for steel products for the rest of the year. Further updates on cost optimization and debt reduction efforts will also be of interest to us. These will shed some light on the road ahead for Arcelor Mittal.
- Steel Billet Prices, LME [↩]
- The Latest Iron Ore Price Slump: Causes and Effects, Forbes [↩]
- BHP, Rio Gamble With A Stacked Iron Ore Deck, Mineweb [↩]
- ArcelorMittal’s Q4 2013 Earnings Presentation, Arcelor Mittal Website [↩]
- ArcelorMittal Signs Sale And Purchase Agreement For Sale Of ATIC Stake, Arcelor Mittal Press Release [↩]