Cost Savings Offset Impact Of Weak Iron Ore And Steel Prices On ArcelorMittal’s Q3 Results
ArcelorMittal (NYSE:MT) released its third quarter results and conducted a conference call with analysts on November 7. The company’s closely-watched earnings before interest taxes depreciation and amortization (EBITDA) figure rose 11.2% to $1.91 billion in Q3 2014 from $1.71 billion in Q3 2013, primarily as a result of higher steel shipments and the company’s cost optimization and operational improvement initiatives. [1] As expected, lower iron ore prices in the third quarter weighed on the fortunes of the company’s Mining division, which has steadily been increasing market priced iron ore shipments. The impact of lower iron ore prices on the Mining segment was partially offset by a reduction in unit cash costs due to an expansion in production volumes and the company’s cost reduction efforts.
Revenues for the third quarter stood at $20.1 billion, around 2.2% higher than in the corresponding period last year. This was primarily due to higher steel shipments in the third quarter of this year, which were 3.9% higher as compared to Q3 2013, as a result of improved market conditions. Net income improved to $22 million in the third quarter, as compared to a loss of $193 million in the corresponding period a year ago. [2]
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Iron Ore Prices
ArcelorMittal’s iron ore shipments are either transferred to its steel producing divisions on a cost-plus basis or sold at market prices, either to third parties or to the company’s steel producing divisions. The company is raising its proportion of market-priced iron ore shipments. Market-priced shipments accounted for 52.9% of the company’s iron ore shipments in 2012. [3] This figure rose to 58.9% in 2013 and to 63.3% in the first nine months of 2014. ((ArcelorMittal’s Q3 2014 Earnings Release, SEC)) Weak iron ore prices negatively impacted the results of the Mining division.
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] Chinese steel demand growth is expected to slow to 3% and 2.7% in 2014 and 2015 respectively, from 6.1% in 2013. [5] Weak demand for steel has indirectly resulted in weak demand for iron ore.
On the supply side, expansion in production by 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. [6] Iron ore prices stood at $81 per dry metric ton (dmt) at the end of October, around 39% lower than at the corresponding point of time last year. [7] As per Goldman Sachs, the worldwide surplus of seaborne iron ore supply will rise to 175 million tons in 2015, from an expected 72 million tons for 2014 and 14 million tons for 2013. [8] In view of the persisting oversupply situation, iron ore prices will remain subdued in the near term.
Segment-wise Performance
The North American Free Trade Agreement (NAFTA) segment’s steel shipments stood at 5.87 million tons in Q3 2014, up 1.6% as compared to Q2 2013, as a result of improved demand conditions. These improved demand conditions were also reflected in the segments’s average steel selling price, which stood at $853 per ton in Q3 2014, around 4.3% higher than in Q3 2013. However, EBITDA for the segment rose only 2.8%, as compared to the corresponding period last year, as higher repair and maintenance costs partially offset the positive impacts of higher volumes and price realizations. [2]
The Europe segment’s steel shipments rose to 9.83 million tons in Q3 2014, around 6.2% higher than in the corresponding period a year ago. The segment’s average steel selling price declined 3.6% year-over-year to $760 per ton in Q3 2014. EBITDA for the segment rose 72.6% from Q3 2013 to $523 million in the third quarter this year, primarily as a result of the company’s cost optimization efforts. [2]
The Brazil segment’s steel shipments rose to 2.84 million tons in Q3 2014, up 11% from the corresponding period a year ago. This was primarily as a result of the restart of blast furnace No.3 at Tubarão, early on in the third quarter. However, the segment’s average steel selling price declined 3% year-over-year to $866 per ton in Q3 2014, reflecting subdued demand due to economic weakness in the region. [2] This is reflected in the Manufacturing Purcahsing Managers’ Index (PMI) for the country, which is a barometer of business conditions in the manufacturing sector. When the Manufacturing PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has registered values of less than 50 for most of Q2 and Q3. [9]
The Mining segment reported an increase in the company’s own iron ore production, which stood at 15.8 million tons in Q3 2014, around 6% higher than in Q3 2013. Shipments at market price stood at 10 million tons in Q3 2014, around 6.4% higher than in Q2 2013. However, lower year-over-year iron ore prices negatively impacted the results of the Mining division, as discussed earlier. EBITDA for the segment fell 47.8% from Q3 2013 to $278 million in Q3 2014. [2]
Cost Savings and Debt Reduction
Given the weak steel pricing environment, ArcelorMittal’s cost optimization efforts have boosted its margins. The company realized savings of $1.1 billion in 2013. It is maintaining its emphasis on cost reduction 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. It has been selling off its non-core businesses in order to reduce its debt burden. The company has generated approximately $4.3 billion in cash proceeds from sales of non-core assets since September 2011. [11] Net debt for the company stood at $17.8 billion on September 30, 2014, up from $17.4 billion on June 30, 2014. ((ArcelorMittal’s Q3 2014 Earnings Release, SEC)) The increase in net debt in Q3 was due to investment in working capital and payment of dividends offset by favorable foreign exchange effects on Euro-denominated debt. [2] The company has a medium term net debt target of $15 billion. [1] With an uncertain outlook for iron ore and steel demand expected in the near term, there are potentially more non-core asset sales on the horizon for ArcelorMittal.
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- ArcelorMittal’s Q3 2014 Earnings Conference Call Transcript, Seeking Alpha [↩] [↩]
- ArcelorMittal’s Q3 2014 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩]
- ArcelorMittal’s 2013 20-F, SEC [↩]
- China Ore Stockpiles Rise to Record on Financing Deals, Bloomberg [↩]
- Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association [↩]
- BHP, Rio Gamble with Stacked Iron ore Deck, Mineweb [↩]
- Iron Ore Spot Prices, Y Charts [↩]
- Iron Ore Price Forecast Cut by Morgan Stanley on Supply, Bloomberg [↩]
- Brazil Manufacturing PMI, Trading Economics [↩]
- ArcelorMittal’s Investor Day 2014 Presentation, ArcelorMittal Website [↩]
- ArcelorMittal’s Q3 2014 Earnings Presentation, ArcelorMittal Website [↩]