Lower Iron Ore Prices Offset Impact of Higher Steel Shipments on ArcelorMittal’s Q2 Results

ArcelorMittal (NYSE:MT) released its second quarter results and conducted a conference call with analysts on August 1. The company’s earnings before interest taxes depreciation and amortization (EBITDA) rose 3.7% to $1.76 billion in Q2 2014 from $1.7 billion in Q2 2013, primarily as a result of higher steel shipments and the company’s cost reduction initiatives. ^[1] The EBITDA figure was lower than analysts’s consensus estimate of $1.85 billion. ^[2] Lower-than-expected iron ore prices in the second quarter weighed on the fortunes of the company’s Mining division, which has steadily been increasing market priced iron ore shipments. In view of the subdued iron ore pricing environment, the company has revised down its EBITDA forecasts and iron ore price expectations for 2014.

Revenues for the second quarter stood at $20.7 billion, around 2.5% higher than in the corresponding period last year. This was primarily due to higher steel shipments in the second quarter of this year, which were 2.5% higher as compared to Q2 2013, as a result of improved market conditions. Net income improved to $52 million in the second quarter, as compared to a loss of $0.78 billion in the corresponding period a year ago. ^[3]

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Iron Ore Prices

Iron ore is an important raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining its prices. International iron ore prices are largely determined by Chinese demand since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. ^[4] Flagging demand for iron ore from China in the wake of an economic slowdown earlier on in the year, 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 slowed to multi-year lows in the first two months of the year. ^[5] A Chinese government crackdown on polluting steel plants has forced many of them to shut down. In addition, tightening of credit by Chinese banks to steel mills that are not performing well will negatively impact these mills’ prospects. ^[6] Furthermore, the Chinese leadership has proposed structural reforms of the economy, shifting the emphasis from investment and export driven growth to services and consumption led growth. Such a transformation of the Chinese economy may negatively impact Chinese demand for steel in the long term. Chinese steel demand growth is expected to slow to 3% and 2.7% in 2014 and 2015 respectively, from 6.1% in 2013. ^[7] Weak demand for steel has indirectly resulted in weak demand for iron ore.

On the supply side, expansion in production by iron ore majors such as Rio Tinto and BHP Billiton has created an oversupply situation. A combination of weak demand and oversupply is likely to result in lower iron ore prices in the near term. ^[8] Iron ore prices stood at $92.74 per ton at the end of June 2014, around 19% lower than the value a year ago. ^[9]

Segment-wise Performance

The North American Free Trade Agreement (NAFTA) segment’s steel shipments stood at 5.79 million tons in Q2 2014, up 6.6% as compared to Q2 2013, as a result of improved demand conditions, offset by a reduction in shipments due to weather-related issues. The segment’s average steel selling price stood at $856 per ton in Q2 2014, which was 1.8% higher than in Q2 2013. As a result of higher realized prices and shipments, the segment’s revenues stood at 5.42 billion in Q2 2014, up 13.1% as compared to the corresponding period last year.((ArcelorMittal’s Q2 2014 Earnings Release, SEC))

The Brazil segment’s revenues stood at $2.43 billion in Q2 2014, around 7% lower than the corresponding period a year ago. This was as a result of lower steel shipments and realized prices as compared to Q2 2013. Steel shipments stood at 2.31 million tons, nearly 7% lower than a year ago and realized prices stood at $934 per ton, around 2.6% lower than the corresponding period a year ago. Shipments and prices were lower as a  result of weak demand conditions for steel in the region. ((ArcelorMittal’s Q2 2014 Earnings Release, SEC))

The Europe segment reported quarterly revenues of  $10.52 billion, nearly flat as compared to the corresponding period a year ago. A marginal increase in steel shipments from 10.01 million tons in Q2 2013 to 10.19 million tons in Q2 2014, was offset by a marginal decline in the average steel selling price from $807 per ton to $799 per ton over the same period. ((ArcelorMittal’s Q2 2014 Earnings Release, SEC))

The Africa & Commonwealth of Independent States (ACIS) segment’s revenue rose to $2.3 billion, around 7% higher than the corresponding period last year. Steel shipments stood at 3.31 million tons, a 7.1% increase as compared to the corresponding period last year. The effect of higher shipments was partially offset by a decline a decline in the average steel selling price, which fell 5.7% as compared to a year ago. ((ArcelorMittal’s Q2 2014 Earnings Release, SEC))

The Mining segment reported an increase in the company’s own iron ore production, which stood at 16.6 million tons in Q2 2014, 10.7% higher than in Q2 2013. Shipments at market price stood at 10.5 million tons in Q2 2014, around 29% higher than in Q2 2013. However, the increase in shipments was offset by a fall in iron ore prices, as discussed earlier. As a result, the segment’s revenue stood at $1.38 billion in Q2 2014, around 2% higher than in the corresponding period a year ago. ((ArcelorMittal’s Q2 2014 Earnings Release, SEC))

Cost Savings and Debt Reduction

ArcelorMittal’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. ^[10]

Due to a high level of debt on ArcelorMittal’s balance sheet and a weak steel industry outlook, major rating agencies downgraded the company’s credit rating to junk status in 2012. This raised the cost of borrowing for the company. ArcelorMittal has since then embarked upon a concerted effort to pare down its heavy debt burden. Net debt for the company stood at $17.4 billion on June 30, 2014, down from $18.5 billion on March 31, 2014. ^[11] The decrease in net debt was primarily due to release in operating working capital and proceeds from mergers and acquisition (M&A) activities. ArcelorMittal sold off its stake in the European port handling and logistics company, ATIC Services S.A. to HES Beheer N.V. for net proceeds of $144 million in the second quarter . ^[12] The transaction is consistent with the company’s strategy of selectively divesting its non-core assets in order to pare down its debt. The company has generated approximately $4.7 billion from asset sales from September 2011 to December 2013. ^[13]

Outlook

In view of the subdued iron ore pricing environment, the company has lowered its average iron ore price expectation for 2014 to $105 per ton from $120 per ton previously. As a result the company’s EBITDA guidance for 2014 has also been lowered to $7 billion from $ 8 billion previously. The company continues to expect a 3% growth in its steel shipments in 2014, as compared to the previous year. ((ArcelorMittal’s Q2 2014 Earnings Release, SEC))

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1. ArcelorMittal’s Q2 2014 Earnings Presentation, ArcelorMittal Website [↩]
2. ArcelorMittal announces the publication of sell-side analysts’ consensus figures for second quarter 2014, ArcelorMittal Press Release [↩]
3. ArcelorMittal’s Q2 2014 Earnings Release, SEC [↩]
4. China Ore Stockpiles Rise to Record on Financing Deals, Bloomberg [↩]
5. China Premier Warns On Economic Slowdown As Data Fans Stimulus Talk, Reuters [↩]
6. The Latest Iron Ore Price Slump: Causes and Effects, Forbes [↩]
7. Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association [↩]
8. BHP, Rio Gamble with Stacked Iron ore Deck, Mineweb [↩]
9. Iron Ore Spot Price Chart, Y Charts [↩]
10. ArcelorMittal’s Investor Day 2014 Presentation, ArcelorMittal Website [↩]
11. ArcelorMittal’s 2013 20-F, SEC [↩]
12. ArcelorMittal Signs Sale And Purchase Agrement For Sale Of ATIC Stake, ArcelorMittal Press Release [↩]
13. Global Steel And Mining Conference 2013 Presentation, ArcelorMittal Website [↩]