ArcelorMittal Earnings Review: Weak Iron Ore Prices And Dollar Strength Weigh On Q2 Results
ArcelorMittal (NYSE:MT) released its second quarter results and conducted a conference call with analysts on July 31. [1] As expected, the company’s results were negatively impacted by a combination of the impact of weak iron ore prices on the earnings of the company’s Mining division, and the impact of a strong U.S. Dollar on the earnings of the company’s international steelmaking operations. In addition, weak market conditions for steel in North America, as a result of competition from cheap steel imports, also weighed on the company’s Q2 results. ArcelorMittal’s closely-watched earnings before interest, taxes, depreciation, and amortization (EBITDA) figure fell around 21% year-over-year to $1.40 billion. [2]
Revenues for the second quarter stood at $16.9 billion, around 18% lower than in the corresponding period last year. [2] This was primarily due to lower revenues from ArcelorMittal’s Mining division, which was impacted by the decline in iron ore prices, and the impact of the depreciation of global currencies against the Dollar on the revenues of the company’s international operations. In this article, we will take a closer look at ArcelorMittal’s second quarter results.
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 has been raising the proportion of market-priced iron ore shipments over the last few years. Market-priced shipments accounted for 53% of the company’s iron ore shipments in 2012. [3] This figure rose to 63% in the first half of 2015. [2]
Iron ore is the chief 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 Chinese steel mills purchase nearly two-thirds of the world’s seaborne iron ore supply. [4] Chinese steel demand growth is expected to decline by 0.5% in 2015, following on from a 3.3% 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 437 million tons in 2018, from an expected surplus of 184 million tons in 2015. [7] A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term. The following chart illustrates the trajectory of iron ore prices over the last twelve months.
Iron Ore Prices, Source: Y Charts
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 30% year-over-year fall in revenues to $964 million in Q2 2015. [2] In addition, the division’s EBITDA fell sharply by roughly 70% to $115 million. [2] Thus, the Mining segment’s performance was a major drag on the company’s Q2 results.
Performance of Steelmaking Segments
The results of the company’s international steelmaking operations were negatively impacted by weakness in steel pricing in Dollar terms, primarily as a result of the strengthening of the Dollar against global currencies. 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 marginal 1% year-over-year decline in EBITDA to $680 million, with the company’s cost reduction initiatives and an increase in the division’s steel shipments largely offsetting the impact of the sharp decline in realized prices. [2] The division’s realized prices fell 23% year-over-year to $617 per ton, primarily due to the depreciation of the Euro against the Dollar. [8] However, rising demand for steel in the EU, as a result of improving economic conditions, boosted the division’s shipments by 7% year-over-year to 10.9 million tons. [2] In conjunction with the impact of higher shipment volumes, the company’s cost reduction initiatives helped neutralize the impact of Euro depreciation on the segment’s results. [9]
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 these imports much cheaper in Dollar terms. [10] As a result of the competition from cheap steel imports, the NAFTA division’s realized prices fell 15% year-over-year to $726 per ton. [8] In addition, the division’s steel shipments declined 3% year-over-year to 5.64 million tons. [2] Excluding the impact of a $90 million one-time charge in Q2 2014, the division’s EBITDA declined 16% to $225 million. [2]
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 26% year-over-year to $695 per ton. [8] The division’s shipments rose 23% year-over-year to 2.84 million tons, due to the restart of a blast furnace, which boosted production volumes. [2] 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 13% year-over-year to $360 million. [2]
Cost Reduction
ArcelorMittal’s cost optimization efforts partially offset the negative impact of Dollar strengthening, weakness in iron ore prices, and rising U.S. steel imports on the company’s results. Though the company did not specify the quantum of margin improvement realized as a result of it cost reduction initiatives in Q2, it has targeted savings of $900 million for 2015. [11] The company realized cumulative savings of $2.1 billion in 2013 and 2014. [11] Given the challenging business conditions facing ArcelorMittal, the company’s cost reduction initiatives will play a pivotal role in boosting its profits over the rest of 2015.
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Notes:
- ArcelorMittal’s Financial Calendar, ArcelorMittal Website [↩]
- ArcelorMittal’s Q2 2015 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- ArcelorMittal’s 2013 20-F, SEC [↩]
- China Plans Iron Ore Subsidy for Miners Amid Rout, News Says, Bloomberg [↩]
- Short Range Outlook 2015-2016, World Steel Association [↩]
- BHP, Rio Gamble with Stacked Iron Ore Deck, Mineweb [↩]
- Iron Ore Majors Boosting Supply as Glut, China Sink Prices, Bloomberg [↩]
- ArcelorMittal’s Q2 2015 Earnings Presentation, ArcelorMittal website [↩] [↩] [↩]
- ArcelorMittal’s Q2 2015 Earnings Call Transcript, Seeking Alpha [↩]
- ArcelorMittal’s 2014 20-F, SEC [↩]
- ArcelorMittal’s Q4 2014 Earnings Presentation, ArcelorMittal Website [↩] [↩]