ArcelorMittal Maintains Strategic Thrust On Automotive Steel With Announcement Of Indian MoU

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ArcelorMittal (NYSE:MT), the world’s largest steel producer, recently announced the signing of a Memorandum of Understanding (MoU) with Steel Authority of India Limited (SAIL), India’s largest steel producer, for the setting up of an automotive steel facility under a joint venture arrangement. [1] The signing of this MoU is a part of ArcelorMittal’s strategic focus on automotive steel. Given the uncertain global demand and pricing environment for steel, automotive steel, with its relatively high and stable margins, constitutes an important focus area for the company. [2] Coming on the heels of a similar joint venture agreement between ArcelorMittal and China’s Hunan Valin Iron and Steel Company last year, the move also increases the company’s exposure to high growth emerging markets.

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Steel Demand And Prices

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The principal consumers of steel products are the automotive, construction, appliance, machinery, equipment, infrastructure, and transportation industries. The nature of business of 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. [3]

Steel prices have fallen over the last few years, driven primarily by weak demand due to adverse macroeconomic conditions in the developed economies and an oversupply situation. This is indicated by trends in the London Metal Exchange (LME) Steel Billet Prices. [4] ArcelorMittal derives around 75% of its revenues from developed markets, primarily Europe and North America. [5] Over the course of the last year or so, steel prices have recovered in the North American Free Trade Agreement (NAFTA) region, which consists of the U.S., Canada, and Mexico, driven by an economic recovery in the U.S., particularly in the manufacturing sector. However, over the course of the last year, there has been an increase in cheap steel imports into the U.S., partly because of the strengthening of the U.S. Dollar against global currencies. 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. [6] The increase in steel imports has negatively impacted realized prices and shipments for the company in North America. 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 in Q1. [7] In addition, the division’s steel shipments declined 3% year-over-year to 5.5 million tons in Q1. [7] As a result of these weak market conditions, the World Steel Association has revised downward expectations of steel demand growth in the North American Free Trade Agreement (NAFTA) region to -0.9% in 2015, from previous estimates of 3.4% growth. [8]

ArcelorMittal’s prospects in Europe have been negatively impacted by the depreciation of the Euro against the Dollar. In Q1 2015, the company’s European operations reported a 22% decline in year-over-year realized prices  to $633 per ton, primarily due to the depreciation of the Euro against the U.S. Dollar. [7] Though the demand for steel in Europe is expected to rise by 2.1% in 2015, the weakening of the Euro against the Dollar remains an area of concern for the company. [8]

With demand for steel still recovering, and a pricing environment that is relatively subdued, ArcelorMittal has focused on its automotive steel sales. Automotive steel commands relatively higher margins, with 20-30% of the average selling price being attributable to the value-added nature of the product. [2] Further, with its core markets of Europe and North America relatively subdued, the company is also trying to increase its exposure to high growth emerging markets.

ArcelorMittal’s Automotive Focus

Automotive steel is a major thrust area for ArcelorMittal. As per the company’s estimates, its flat products accounted for approximately 17% of the global automotive steel market in 2014. [6] Shipments of automotive steel accounted for around 16% of ArcelorMitttal’ s total shipments in 2014. [6] The company’s automotive steel shipments are mainly delivered in the geographic markets of its production facilities in Europe, North and South America, and South Africa. [3] Given the limited exposure of ArcelorMittal to emerging markets, it is consciously trying to increase its exposure to high growth opportunities in these markets.

Automobile markets in China and India are set to experience rapid growth in the years to come. The Chinese automobile market is set to grow rapidly with automobile sales set to rise to around 30 million units by 2020, around 40% higher than current levels. [9] India’s automobile sales are expected to double to 7 million units by 2020, from current levels of around 3.5 million. [1] Considering this opportunity, ArcelorMittal invested $832 million last year in an automotive steel plant in a joint venture with Hunan Valin Iron and Steel Company. [10] The plant’s production capacity of 1.5 million tons of automotive steel significantly boosted ArcelorMittal’s automotive steel production capacity and gave the company additional exposure to the Chinese market. Similarly, the company’s recently announced MoU with SAIL is aimed at tapping growth in the Indian automotive market.

As far as developed markets are concerned, ArcelorMittal’s acquisition of Thyssenkrupp’s automotive steel plant in Calvert, Alabama last year was aimed at increasing its presence in the North American Free Trade Agreement (NAFTA) automotive steel market. The Calvert plant is a state-of-the-art facility which is capable of producing advanced high strength steels. [2] ArcelorMittal has invested heavily in R&D in order to produce advanced high strength steel (AHSS) grades that cater to automobile manufacturers’ needs for fuel economy, safety, and reduced carbon dioxide emissions. The company is focused on preventing Original Equipment Manufacturers (OEMs) from turning to alternative materials such as aluminum. Prominent examples of ArcelorMittal’s innovation are the S-in motion project, which reduces the body weight of a typical C-segment vehicle by up to 23% and reduces vehicular carbon dioxide emissions by 14%. [1]

The company’s management has repeatedly stressed the strategic importance of automotive steel in the company’s plans for the future. [11] Given the recent activity pertaining to the automotive sector at ArcelorMittal, the company management has been true to its word.

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Notes:
  1. ArcelorMittal and SAIL sign MoU on automotive steel joint venture in India, ArcelorMittal Website [] [] []
  2. Global Natural Resources Conference, ArcelorMittal Company Presentation [] [] []
  3. ArcelorMittal’s 2013 20-F, SEC [] []
  4. Steel Billet Prices, LME []
  5. ArcelorMittal’s Investor Presentation 2014, ArcelorMittal Website []
  6. ArcelorMittal’s 2014 20-F, SEC [] [] []
  7. ArcelorMittal’s Q1 2015 Earnings Release, SEC [] [] []
  8. Short Range Outlook 2015-2016, World Steel Association [] []
  9. New Survey Predicts China Will Add 30 Million New Cars Each Year, CNBC []
  10. Valin ArcelorMittal Automotive Steel Co Inaugurates Landmark Automotive Steel Plant In China, ArcelorMittal Press Release []
  11. ArcelorMittal’s Q1 2015 Earnings Call Transcript, Seeking Alpha []