Cost Reduction Initiatives Partially Offset Impact Of Lower Iron Ore Prices On ArcelorMittal’s Q4 Results
ArcelorMittal (NYSE:MT) released its fourth quarter results on February 13. The company’s closely-watched earnings before interest taxes depreciation and amortization (EBITDA) figure fell around 5% year-over-year to $1.82 billion in Q4 2014, primarily due to the impact of weak iron ore prices on the results of the company’s Mining division. [1] However, higher steel shipments and the company’s cost optimization and operational improvement initiatives offset some of the impact of lower iron ore prices on the company’s profits.
Revenues for the fourth quarter stood at $18.7 billion, around 5.7% lower than in the corresponding period last year. [1] This was primarily due to lower revenues from ArcelorMittal’s Mining division, which was impacted by lower iron ore prices, and lower revenues from the company’s European steelmaking operations. ArcelorMittal’s European steel sales are denominated in Euros. Revenues from the European steelmaking operations fell mainly due to a fall in realized prices as a result of the depreciation of the Euro against the Dollar.
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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 53% of the company’s iron ore shipments in 2012. [2] This figure rose to 59% and 62% in 2013 and 2014, respectively. [1]
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. [3] Chinese steel demand growth is expected to slow to 2.7% in 2015, from 3% and 6.1% in 2014 and 2013, respectively. [4] Weak demand for steel has indirectly resulted in weak demand for iron ore.
On the supply side, an expansion in production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term. [5] Iron ore prices stood at $68 per dry metric ton (dmt) at the end of December 2014, around 50% lower as compared to prices at the end of December 2013. [6] The worldwide surplus of seaborne iron ore supply is expected to rise to 300 million tons in 2017, from an expected surplus of 175 million tons in 2015, and a surplus of 72 million tons and 14 million tons in 2014 and 2013, respectively. [7] [8]
Weak iron ore prices have negatively impacted the results of ArcelorMittal’s Mining division. As a result of the fall in iron ore prices, the company’s Mining division reported a 35% year-over-year fall in revenues to $1.06 billion in Q4 2014. [1] The division’s EBITDA fell around 60% to $232 million in Q4 2014. [1] The Mining segment’s performance was a major drag on the company’s Q4 results, offsetting the gains from an improvement in the results of the company’s steelmaking operations.
Performance of Steelmaking Segments
The year-over-year results of the company’s steelmaking operations were boosted by improved market conditions for steel. ArcelorMittal’s steel shipments rose 3.4% year-over-year to 21.2 million tons in Q4 2014. [1] Shipments were higher across all of ArcelorMittal’s geographically segmented steelmaking operations, particularly in Brazil, where the restart of a blast furnace led to a 23.5% increase in year-over-year shipments from the division. [1]
The company’s ongoing cost reduction and operational improvement initiatives boosted the results of its steelmaking operations, particularly those of the Europe and the Africa and Commonwealth of Independent States (ACIS) divisions. The Europe business segment, which accounts for around half of the company’s revenues, reported a 36.6% year-over-year improvement in EBITDA to $557 million, primarily due to lower raw material costs and the company’s cost reduction initiatives. [1] Investments made by the company in improving plant reliability, in order to minimize unplanned downtime at its ACIS operations, as well as cost reduction initiatives, boosted the division’s EBITDA by 173.6% year-over-year to $147 million. [1] The company’s cost reduction initiatives resulted in total gains of around $1 billion in 2014 and a cumulative $2.1 billion in 2013 and 2014. [1] The company’s cost reduction initiatives have played a major role in boosting its results, particularly as the depreciation of major currencies against the Dollar has negatively impacted price realizations for the company’s steelmaking operations. Realized prices for ArcelorMittal’s Europe and Brazil business segments fell around 10% and 20% respectively, primarily as a result of the depreciation of the Euro and the Real against the Dollar. [1]
Cost Savings and Debt Reduction
Given the weak steel pricing environment, ArcelorMittal’s cost optimization efforts have boosted its margins. The company realized cumulative savings of $2.1 billion in 2013 and 2014. It is maintaining its emphasis on cost reduction with another $900 million in savings targeted for 2015. [9]
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. [10] Net debt for the company stood at $15.8 billion at the end of 2014. [11] Earlier on in the month, the company’s long-term credit rating was further reduced by Standard & Poor’s to BB from BB+. [1] The company has a medium term net debt target of $15 billion. [12] With the latest ratings downgrade, the company is expected to continue with its policy of debt reduction, which may include potential asset sales in order to reduce the company’s debt.
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Notes:
- ArcelorMittal’s Q4 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 [↩]
- Iron Ore Caps 2014 Loss as Morgan Stanley Says Worst Over, Bloomberg [↩]
- ArcelorMittal’s Q4 2014 Earnings Presentation, ArcelorMittal Website [↩]
- ArcelorMittal’s Q3 2014 Earnings Presentation, ArcelorMittal Website [↩]
- ArcelorMittal’s Q3 2014 Earnings Release, SEC [↩]
- ArcelorMittal’s Q3 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]