How ArcelorMittal Could Be Impacted By The Potential Imposition Of Anti-Dumping Duties On U.S. Steel Imports

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A sharp increase in steel imports into the U.S. has negatively impacted the prospects of steelmakers such as ArcelorMittal (NYSE:MT). The company’s results have suffered from an increase in steel imports and subdued demand conditions, which has negatively impacted realized prices and shipments of the company’s North American Free Trade Agreement (NAFTA) division, which accounts for around a quarter of the company’s revenues. [1] This was reflected in the company’s Q1 results, with shipments for the NAFTA segment standing at 5.46 million tons, as compared to 5.61 million tons in the corresponding period of 2014. [2] In addition, competition from cheap imports drove down average realized prices for the division in Q1, which fell 5% year-over-year to $796 per ton. [2]

As per the domestic steel industry, a significant proportion of these imports are priced unfairly low. In response to the sharp rise in steel imports, steelmakers with significant operations in the U.S., including ArcelorMittal, have petitioned the U.S. International Trade Commission  seeking the imposition of anti-dumping duties on imported steel from China, India, Italy, South Korea, and Taiwan for alleged unfair pricing of these imports. [3] If anti-dumping duties are levied upon these steel imports, it would make imported steels less competitive and boost the prospects of steelmakers such as ArcelorMittal. In this article, we will explore the impact of this scenario on ArcelorMittal’s stock price.

Impact of Imposition of Anti-dumping Duties on Steel Imports on ArcelorMittal

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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. [1] Two important reasons for the increase in steel sheet imports are the strengthening of the U.S. Dollar and the sharp increase in Chinese steel exports. Steel imports to the U.S. have been bolstered by the strengthening of the U.S. Dollar against global currencies, which has made these imports cheaper in Dollar terms.

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 95, as compared to 80 twelve months ago. [4] A higher value of the Dollar Index implies a stronger U.S. Dollar.

Dollar Index

(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 made cheap steel imports even cheaper in Dollar terms, which has boosted these steel imports.

In addition to the strengthening of the Dollar, there has been a sharp increase in steel exports from China. The Chinese steel industry is currently facing weak domestic demand, primarily due to a slowing Chinese economy. Domestic demand for steel stood at 711 million tons in 2014. [5] In comparison, Chinese steel production in 2014 stood at 823 million tons in 2014. [6] This oversupply situation in the Chinese domestic steel market has provided a sharp boost to Chinese steel exports, which rose 36% year-over-year in the first four months of 2015. [3]

The net result of the surge in steel sheet imports has been a reduction in shipments and realized prices for ArcelorMittal’s NAFTA division. A final ruling on the petition by the domestic steel industry to impose anti-dumping duties on steel imports is expected by 2016. [3] If this ruling is in the domestic steel industry’s favor, it would boost shipments, realized prices, and margins for the NAFTA division. In order to model this scenario, we will factor in a 5% increase in both shipments and realized prices for the NAFTA division by 2021 over our current estimates, as well as a corresponding increase in margins for the division. If we factor in these assumptions into our model, our price estimate increases by around 13% from $10.04 to $11.34. Thus, if anti-dumping duties are imposed on steel imports, an upward revision in valuation could potentially follow for ArclorMittal.

See our complete analysis for this scenario here

 

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Notes:
  1. ArcelorMittal’s 2014 20-F, SEC [] []
  2. ArcelorMittal’s Q1 2015 Earnings Release, SEC [] []
  3. U.S. Steelmakers Seek Antidumping Action Against China, Four Others, Wall Street Journal [] [] []
  4. Dollar Index, Bloomberg Business []
  5. Short Range Outlook 2015-16, World Steel Association []
  6. World Crude Steel Production, World Steel Association []