ArcelorMittal’s Earnings Review: Weak Iron Ore Prices And Subdued Market Conditions For Steel Weigh On Q1 Results
ArcelorMittal (NYSE:MT) released its first quarter results on April 7. The company’s closely-watched earnings before interest taxes depreciation and amortization (EBITDA) figure fell around 21% year-over-year to $1.38 billion. [1] The decline in the company’s EBITDA was due to a combination of the impact of weak iron ore prices on the results of the company’s Mining division and weak market conditions for steel in North America as a result of competition from cheap steel imports. In addition, the strengthening of the U.S. Dollar against global currencies weighed on the results of the company’s international steelmaking operations.
Revenues for the first quarter stood at $17.1 billion, around 13% 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 the impact of the depreciation of global currencies against the Dollar on the revenues of the company’s international operations .
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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. [3]
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. Benchmark 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 decline by 0.5% in 2015, following on from a similar decline in 2014. [5] 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. [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] A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term. Subdued iron ore prices will weigh on the results of the company’s Mining division in Q1.
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 40% year-over-year fall in revenues to $758 billion in Q1 2015. [1] The division’s EBITDA fell around 74% to $114 million in Q1 2014. [1] Thus, the Mining segment’s performance was a major drag on the company’s Q1 results.
Performance of Steelmaking Segments
The results of the company’s steelmaking operations were negatively impacted by weakness in steel pricing, primarily as a result of the strengthening of the Dollar. In addition, the results of the company’s North American operations were negatively impacted by competition from steel imports.
The results of the Europe business segment, which accounts for around half of the company’s revenues, reported a 15% year-over-year improvement in EBITDA to $616 million, due to lower raw material costs, the company’s cost reduction initiatives, and an increase in the division’s steel shipments. [1] An improvement in economic conditions in the EU boosted the division’s shipments by 7% year-over-year to 10.7 million tons. [1] However, the results of this division were negatively impacted by a sharp fall in realized prices, which fell 22% year-over-year to $633 per ton, primarily due to the depreciation of the Euro against the U.S. Dollar. [1]
The results of the North American Free Trade Agreement (NAFTA) division were negatively impacted by a surge in steel imports into the U.S. The penetration of finished steel imports as a percentage of the U.S. domestic steel market increased to 28.1% in 2014, up from 23.2% in 2013, partly as a result of the strengthening of the U.S. Dollar, which made imports even cheaper in Dollar terms. [9] As a result of the competition from cheap steel imports, the NAFTA division’s realized prices fell 5% year-over-year to $796 per ton. [1] In addition, the division’s steel shipments declined 3% year-over-year to 5.5 million tons. [1] Lower realized prices and shipments resulted in an 82% decline in the division’s EBITDA to $53 million. [1]
The results of the Brazil division were negatively impacted by a weakening of the Brazilian Real against the U.S. Dollar. Average realized prices for the division, in Dollar terms, fell 20% year-over-year to $713 per ton. [1] The division’s shipments rose 16% year-over-year to 2.7 million tons, due to the restart of a blast furnace. [1] The rise in shipments and the company’s cost reduction efforts partially offset the impact of the weakening of realized prices, with the division’s EBITDA declining 11% year-over-year to $377 million. [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. [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 $16.6 billion at the end of Q1. [1] The company has a medium term net debt target of $15 billion. [9] Earlier on in February, the company’s long-term credit rating was further reduced by Standard & Poor’s to BB from BB+. [9] With the latest ratings downgrade, the company management reiterated its commitment to debt reduction. [12] Given the relatively subdued market conditions for steel, a reduction in ArcelorMittal’s debt will stand the company in good stead.
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Notes:
- ArcelorMittal’s Q1 2015 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- ArcelorMittal’s 2013 20-F, SEC [↩]
- ArcelorMittal’s Q4 2014 Earnings Release, SEC [↩]
- China Ore Stockpiles Rise to Record on Financing Deals, Bloomberg [↩]
- Short Range Outlook 2015-2016, World Steel Association [↩]
- BHP, Rio Gamble with Stacked Iron Ore Deck, Mineweb [↩]
- 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 2014 20-F, SEC [↩] [↩] [↩]
- ArcelorMittal’s Q4 2014 Earnings Presentation, ArcelorMittal Website [↩]
- ArcelorMittal’s Q3 2014 Earnings Presentation, ArcelorMittal Website [↩]
- ArcelorMittal’s Q1 2015 Earnings Call Transcript, Seeking Alpha [↩]