ArcelorMittal Q3 2015 Earnings Preview: Weak Market Conditions For Steel To Negatively Impact Results
ArcelorMittal (NYSE:MT), the world’s largest steel producer, will announce its third quarter results and conduct a conference call with analysts on Friday, November 6. [1] We expect the company’s Q3 results to be negatively impacted by the sharp decline in iron ore prices over the past twelve months and the weak prevailing market conditions for steel in North America. A global iron ore supply glut will negatively impact the margins of ArcelorMittal’s Mining division, its most profitable operating segment last year. Competition from cheap steel imports to the U.S. is likely to negatively impact the results of the company’s North American operations. Furthermore, the strengthening of the U.S. Dollar against global currencies over the past year will negatively impact price realizations for most of ArcelorMittal’s steelmaking divisions in Dollar terms, with the majority of the company’s steelmaking operations located in international jurisdictions. ArcelorMittal’s ongoing cost optimization initiatives are likely to partially offset the negative impact of weak market conditions for steel and iron ore on the company’s earnings in Q3. In this article, we will take a look at what to expect from the company’s Q3 results.
Iron Ore Prices
Iron Ore Prices, Source: Y Charts
Iron ore produced by ArcelorMittal’s Mining division is 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 raised the proportion of market-priced iron ore shipments, which has risen from 53% in 2012 to around 63% in the first half of 2015. [2]
Iron ore is a major input in steelmaking. Thus, demand for iron ore by the global steel industry plays a major role in determining prices of the commodity. International iron ore prices are largely determined by Chinese demand, since the Chinese steel industry accounts for the purchase of roughly two-thirds of the world’s seaborne iron ore supply. [3] With a an economic slowdown in China, the demand for steel has declined. As per World Steel Association estimates, Chinese steel demand will decline by 0.5% in 2015, following on from a 3.3% decline in 2014. [4] Weak demand for steel has translated into weak demand for iron ore.
On the supply side, burgeoning iron ore production by major iron ore miners such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. [5] Increasing production in the face of weak demand is expected to widen the worldwide surplus of seaborne iron ore supply to 437 million tons in 2018, from an expected surplus of 184 million tons in 2015. [6] As a result of the prevailing oversupply situation, iron ore prices are unlikely to increase significantly in the near term. The weakness in iron ore prices will negatively impact the results of ArcelorMittal’s Mining division.
Steel Demand and Prices
Rising steel imports into the U.S. have negatively impacted the fortunes of the U.S. domestic steel industry. A sharp increase in Chinese steel exports and the strengthening of the U.S. Dollar against global currencies, which has made imports cheaper in Dollar terms, have translated into an increase in consumption of imported steels. The market share of finished steel imports in the U.S. domestic steel market increased to 28.1% in 2014, up from 23.2% in 2013, and is expected to rise further in 2015. [7] In addition to the competition from steel imports, weak demand conditions for steel in North America are likely to dampen the results of ArcelorMittal’s NAFTA business segment. As per the World Steel Association, steel demand in North American will decline by 0.9% in 2015. [4] A combination of weak demand conditions and competition from cheap imports is likely to negatively impact both realized prices and shipments for the NAFTA division.
We expect the company’s steel shipments to rise in Europe, given firming demand for steel in the region. As per World Steel Association estimates, steel demand in the Eurozone is expected to grow at 2.1% in 2015. [4] ArcelorMittal’s European operations account for nearly half of the company’s overall steel shipments. However, pricing for the company’s European, as well as other international operations, will be negatively impacted by the strengthening of the Dollar against global currencies. Realized prices for all of ArcelorMittal’s international operations declined 18% or more year-over-year, largely due to the strengthening of the Dollar against global currencies. [2]
ArcelorMittal’s cost reduction initiatives will partially offset the negative impact of the challenging business environment on the company’s quarterly results. As a result of its cost reduction efforts, the company realized cumulative savings of $2.1 billion in 2013 and 2014. ArcelorMittal is targeting another $900 million in savings for 2015. [8] However, given the extremely challenging business conditions facing the company, ArcelorMittal’s Q3 results are expected to suffer, despite its cost reduction initiatives.
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Notes:
- ArcelorMittal’s Financial Calendar, ArcelorMittal Website [↩]
- ArcelorMittal’s Q2 2015 Earnings Release, 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 2014 20-F, SEC [↩]
- ArcelorMittal’s Q4 2014 Earnings Presentation, ArcelorMittal Website [↩]