How A Strong Dollar Impacts Steel Companies
The U.S. Dollar has strengthened considerably over the course of the last twelve months. The Dollar Index, which is a measure of the strength of the Dollar against a basket of other currencies, currently stands at 96, as compared to 80 twelve months ago. [1] A higher value of the Dollar Index implies a stronger U.S. Dollar.
Source:Bloomberg
Though the reasons for the strengthening of the Dollar are manifold, basically a strong U.S. economy relative to other developed economies has helped attract foreign capital flows. The strengthening of the Dollar has had a varied impact upon the operations of steel companies, with exchange rate variations impinging upon revenues, costs, as well as altering the competitive landscape for these companies. In this article, we will take a look at how the strengthening of the U.S. Dollar has impacted the fortunes of ArcelorMittal (NYSE:MT) and U.S. Steel (NYSE:X), two steel majors that Trefis covers.
Revenues and Costs
Both ArcelorMittal and U.S. Steel have a significant but varied proportion of their operations located in international jurisdictions. ArcelorMittal, the largest steel producer in the world, has a majority of its steel operations located internationally. The company generates only around a quarter of its revenues from its North American steel operations, with nearly half of its total revenues accounted for by the company’s European operations. [2] In comparison, U.S. Steel is a mainly U.S. focused company. The U.S. Steel Europe (USSE) segment represents the company’s international operations, which accounted for around 17% of the company’s revenues in 2014. [3]
ArcelorMittal’s non-U.S. subsidiaries bear a part of their input costs in U.S. Dollars, particularly when it comes to raw materials. Iron ore and coking coal purchases are denominated in U.S. Dollars, whereas the sales of the finished products are denominated in the local currencies. [2] Thus, an appreciation of the U.S. Dollar tends to increase the costs of these non-U.S. subsidiaries in terms of local currencies, and weighs on realized prices in terms of U.S. Dollars. Though the company is able to partially offset these effects through hedging its currency exposure, it does put downward pressure on the company’s margins. Similarly, in the case of U.S. Steel, USSE’s costs are denominated in both Dollars and Euros, whereas the sales of the finished products are in Euros. Thus, an appreciation of the Dollar lowers realized prices in Dollar terms and raises operating costs in local currencies.
The impact of the Dollar strengthening on the prospects of these companies can be quantified through their latest quarterly results. U.S. Steel recently reported its Q1 results. Though the company did not explicitly specify the impact of Dollar appreciation on its margins, the impact of a stronger U.S. Dollar is evident through a decline in realized prices for USSE in Dollar terms. Realized prices for the segment declined roughly 25% to $530 per ton in Q1 2015. Prices declined roughly 9% year-over-year in Euro terms, with the remaining 16% of the decline in realized prices attributable to the strengthening of the U.S. Dollar against the Euro. [4] Similarly, realized prices for ArcelorMittal’s Europe and Brazil business segments fell roughly 10% and 20% respectively on a year-over-year basis in Q4 2014, primarily as a result of the depreciation of the Euro and the Brazilian Real against the Dollar. [5] Thus, the strengthening of the U.S. Dollar tends to negatively impact the prospects of both ArcelorMittal and U.S. Steel by lowering realized prices and raising input prices.
Competition from Imported Steels
In addition to exchange rate effects, the strengthening of the U.S. Dollar has exacerbated competition from cheap steel imports to the U.S. domestic steel industry. Most of these imports are sourced from countries with significantly lower labor costs, and in some cases, government support in the form of subsidies to the domestic steel industry. As per assertions by domestic steel producers, a significant proportion of these steel imports are sold at unfairly low prices. [4] With the strengthening of the U.S. Dollar, these steel imports have become even cheaper in Dollar terms. Steel sheet imports to the U.S. accounted for 22% of the domestic market in 2014, up sharply from 15% of the domestic market in 2013. [6] Competition from these steel imports has negatively impacted both shipments and realized prices for the domestic U.S. steel industry. Steel shipments for U.S. Steel’s Flat-rolled Steel segment stood at 2.62 million tons in Q1 2015, as compared to 3.12 million tons in the corresponding period of 2014. [4] In addition, average realized prices for the division fell 1% year-over-year to $768 per ton. [4] ArcelorMittal is set to report its Q1 results soon and we expect the company to report similar pressure on realized prices and shipments for its North American Free Trade Agreement (NAFTA) business segment.
From the foregoing discussion, we can conclude that Dollar appreciation negatively impacts the business prospects of steel companies. Considering the weakness already prevailing in the market conditions for steel, the strengthening of the U.S. Dollar could be a major point of concern for these companies.
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More Trefis Research
- Dollar Index, Bloomberg Business [↩]
- ArcelorMittal’s 2014 10-K, SEC [↩] [↩]
- U.S. Steel’s 2014 10-K, SEC [↩]
- U.S. Steel’s Q1 2015 Earnings Release, SEC [↩] [↩] [↩] [↩]
- ArcelorMittal’s Q4 2014 Earnings Release, SEC [↩]
- U.S. Steel’s Q1 2015 10-Q, SEC [↩]