The Year 2014 In Review: Cost Reductions Offset Impact Of Mixed Market Conditions On ArcelorMittal’s Performance
The year 2014 for ArcelorMittal (NYSE:MT) was marked by an improvement in the company’s operating results, as compared to the previous year. This was mainly due to the success of the company’s efforts to reduce operating costs, in addition to improved market conditions for steel in the North American Free Trade Agreement (NAFTA) region. However, the company continued to face challenging market conditions in other geographies. In addition, the results of the company’s Mining segment were negatively impacted by poor market conditions for iron ore.
ArcelorMittal continued its efforts to deleverage in 2014 through the sale of non-core assets. The company is striving to attain its medium term net debt target. In this article, we will look back at how ArcelorMittal fared in 2014.
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Demand and Pricing for Steel
The principal consumers of steel products are the automotive, construction, appliance, machinery, equipment, infrastructure, and transportation industries. The nature of business in these sectors is cyclical, with demand generally correlated with macroeconomic conditions. Thus, demand for steel products is generally correlated with macroeconomic fluctuations in the global economy.
The year 2014 was characterized by improved economic conditions in the U.S., particularly in the manufacturing sector. The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has consistently registered values of over 50 for all months in 2014 for the U.S. [1] This indicates strong manufacturing activity in the U.S., which was reflected in ArcelorMittal’s results for the first nine months of the year. Average realized steel prices for ArcelorMittal’s NAFTA segment, which primarily serves customers in North America, rose 2.1% year-over-year to $849 per ton in the first nine months of 2014. [2] Steel demand in the NAFTA region, which consists of the U.S., Canada, and Mexico, is expected to grow by 3.8% in 2014, as compared to a 2.4% fall in demand in 2013. [3] Steel demand in the NAFTA region is expected to grow at 3.4% in 2015. [3] A robust steel demand and pricing environment in North America will positively impact the results of the NAFTA division in 2015.
In contrast to the robust demand and pricing environment in the U.S., demand for steel remains muted in Europe and South America, the other major markets for ArcelorMittal. The Manufacturing PMI for the Eurozone has faltered somewhat in the second half of the year, indicating slowing manufacturing activity. The Manufacturing PMI for the Eurozone, which stood at 54 in January 2014, has declined to 50.8 in December. [4] Sluggish manufacturing activity in the Eurozone was reflected in ArcelorMittal’s results for the first nine months of the year. Average realized steel prices for ArcelorMittal’s Europe business segment fell around 2% year-over-year to $789 per ton in the first nine months of 2014. ((ref:2)) However, shipments rose around 4% to 30 million tons over the same period. [2] With weak economic conditions prevailing in Europe, the company may continue to face challenging business conditions in 2015. Sluggish manufacturing activity in South America also weighed upon the results of ArcelorMittal’s Brazil business segment, which represents the company’s steelmaking operations in South America, which are mainly concentrated in Brazil and Argentina. The Manufacturing PMI for Brazil stood at 48.7 in November. [5] Average realized prices for the Brazil segment fell around 3% year-over-year in the first nine months of the year to $896 per ton, with shipments remaining largely flat year-over-year. [2] The Brazil segment’s fortunes in 2015 will largely depend upon the trajectory of economic growth in the region.
Cost 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. [6]
The success of the company’s cost optimization efforts can be gauged through the improvements in the company’s margins, particularly the Europe segment, which accounts for nearly half of the company’s revenues. The EBITDA margin for the Europe segment improved from around 4% in the first nine months of 2013 to 5.7% in the corresponding period this year. [2] The EBITDA margin for the company as a whole improved from around 8.4% in the first nine months of 2013 to around 9% in the corresponding period this year. ((ref:2)) Margins for the company as a whole were weighed down by the results of the company’s Mining division, which suffered due to poor market conditions for iron ore.
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. [7] This figure rose to 58.9% in 2013 and to 63.3% in the first nine months of 2014. ((ref:2)) Weak iron ore prices negatively impacted the results of the Mining division. Prices have fallen roughly 40% this year due to a prevailing oversupply situation. [8] Iron ore prices are expected to fall further next year and remain muted in the near term. [9] Thus, the Mining division’s results will remain under pressure next year.
Debt Reduction
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. [5] 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. [10] Net debt for the company stood at $17.8 billion on September 30, 2014. The company has a medium term net debt target of $15 billion. [11] With a muted 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.
Outlook
The outlook for 2015 remains mixed for ArcelorMittal. An improving U.S. economy should boost the results of the company’s NAFTA segment next year. However, challenging market conditions persist in other geographies. In addition, prospects look quite bleak for the company’s Mining segment in the near term. The company’s ongoing cost reduction efforts will continue to play a major role in boosting the company’s results next year. Taking all these factors into consideration, ArcelorMittal’s profitability is unlikely to improve significantly in 2015.
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More Trefis Research
- U.S. Manufacturing PMI, Trading Economics [↩]
- ArcelorMittal’s Q3 2014 Earnings Release, SEC [↩] [↩] [↩] [↩]
- Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association [↩] [↩]
- Euro Area manufacturing PMI, Trading Economics [↩]
- Brazil Manufacturing PMI, Trading Economics [↩] [↩]
- ArcelorMittal’s Investor Day 2014 Presentation, ArcelorMittal Website [↩]
- ArcelorMittal’s 2013 20-F, SEC [↩]
- Iron Ore Spot Prices, Y Charts [↩]
- Iron Ore Price Forecast Cut by Morgan Stanley on Supply, Bloomberg [↩]
- ArcelorMittal’s Q3 2014 Earnings Presentation, ArcelorMittal Website [↩]
- ArcelorMittal’s Q3 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]