ArcelorMittal Q3 Earnings Review: Challenging Business Conditions Take Their Toll On Results

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ArcelorMittal (NYSE:MT), the world’s largest steelmaker, reported its third quarter results and conducted a conference call with analysts on November 6. [1] As expected, the challenging business conditions impacting the global and domestic steel industries and a sharp decline in iron ore prices negatively impacted the company’s results. ArcelorMittal’s EBITDA margin declined to 8.7% in Q3 2015, as compared to 9.5% in the corresponding period of 2014, with weakness in pricing and shipments, partially offset by the company’s cost reduction initiatives, negatively impacting the company’s results. [2] The key takeaway from the earnings conference call was the management’s acknowledgement of the adverse business environment and a continuing focus on cost reduction and debt management. [1]

Challenging Business Conditions For Steel Industry

The global steel industry has been negatively impacted by a rising tide of steel exports from China. The Chinese steel industry is currently characterized by an oversupply situation, as a result of high production levels in the face of weak demand conditions. As per World Steel Association estimates, demand for steel in China is expected to decline by 0.5% in 2015, following on from a 3.3% decline in 2014. [3] With weak domestic demand conditions prevailing in China, the country’s steel exports have risen sharply, standing at 83.1 million tons in the first nine months of 2015, roughly 27% higher year-over-year. [4]

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Steel imports from China are priced considerably lower as compared to U.S. domestic steel prices, with domestic steelmakers having already petitioned regulatory authorities for the imposition of punitive duties on these imports. However, competition from these imports has affected the fortunes of U.S. steel makers, negatively impacting both pricing and shipments. ArcelorMittal’s NAFTA business segment reported 4% and 18% year-over-year declines in shipment and realized prices respectively, as a result of the adverse business conditions. [2]

Besides competition from Chinese steel exports, the strengthening of the U.S. Dollar against global currencies negatively impacted realized prices for ArcelorMittal’s international steelmaking operations. Realized prices (in Dollar terms) for ArcelorMittal’s Brazil, Europe, and ACIS (Africa and Commewealth of Independent States) divisions declined 28%, 19%, and 30%, respectively, on a year-over-year basis in Q3, putting downward pressure on margins. [2]

Mining Divison

The results of ArcelorMittal’s Mining division were negatively impacted by a sharp downturn in iron ore prices over the past twelve months. Reference iron ore prices for ArcelorMittal’s iron ore sales were around 39% lower on a year-over-year basis in Q3. [2] The following chart illustrates the decline in iron ore prices in the twelve months ending September 2015.

Iron Ore Prices, Source: Y Charts

Iron ore prices have declined considerably over the past twelve months due to an oversupply situation. Global demand for the commodity has weakened as a result of weakening demand for steel in China. The Chinese steel industry accounts for the purchase of roughly two-thirds of the world’s seaborne iron ore supply. [5] 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. [3] Weak demand for steel has translated into weak demand for iron ore, a major input in steelmaking. On the supply side, a continuous increase in iron ore production by major iron ore miners such as Vale, Rio Tinto, and BHP Billiton, despite subdued demand conditions, has created an oversupply situation. [6] The worldwide surplus of seaborne iron ore supply is expected to increase to 437 million tons in 2018, from an expected surplus of 184 million tons in 2015. [7] As a result of the prevailing oversupply situation, iron ore prices are unlikely to increase significantly in the near term.

Cost and Debt Reduction

Given the adverse business conditions facing the company, the management reiterated its commitment to cost reduction and managing the company’s debt. ArcelorMittal’s cost reduction efforts resulted in cumulative savings of $2.1 billion in 2013 and 2014. ArcelorMittal is targeting another $900 million in savings for 2015. [8] In addition, given the weak demand for steel, the company revised downward its capital expenditure guidance for 2015 by around 7%. [2] With demand and pricing for steel expected to remain subdued in the near term, ArcelorMittal’s cost reduction initiatives are necessary to partially offset the negative impact of the adverse business conditions on results.

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Notes:
  1. ArcelorMittal’s Q3 2015 Earnings Conference Call Transcript, Seeking Alpha [] []
  2. ArcelorMittal’s Q3 2015 Earnings Release, ArcelorMittal Website [] [] [] [] []
  3. Short Range Outlook 2015-2016, World Steel Association [] []
  4. China Buys More Iron From Abroad as Steel Exports at Record, Bloomberg []
  5. China Plans Iron Ore Subsidy for Miners Amid Rout, News Says, Bloomberg []
  6. BHP, Rio Gamble with Stacked Iron Ore Deck, Mineweb []
  7. Iron Ore Majors Boosting Supply as Glut, China Sink Prices, Bloomberg []
  8. ArcelorMittal’s Q4 2014 Earnings Presentation, ArcelorMittal Website []