ArcelorMittal Q4 2015 Earnings Review: Challenging Business Conditions Adversely Impact Results
ArcelorMittal (NYSE:MT), the world’s largest steelmaker, reported its fourth quarter results and conducted a conference call with analysts on February 5. [1] As expected, the adverse business conditions affecting both the global and the domestic steel industries and the decline in iron ore prices over the past year negatively impacted the company’s results. The company’s EBITDA margin declined to 7.9% in Q4 2015, as compared to 9.7% in the corresponding period of 2014, with lower realized prices and shipments negatively impacting its Q4 results. [1] With the company continuing to face challenging business conditions, cost and debt reduction is at the forefront of the management’s strategy going forward.
Challenging Business Conditions for Steel Industry
A rising tide of steel exports from China has negatively impacted the global steel industry. China is currently characterized by an oversupply of steel, due to high production levels in the face of weakening demand conditions. As a consequence, Chinese steel exports have risen sharply, standing at 100 million tons in the first eleven months of 2015, around 22% higher year-over-year. [2]
Steel imports from China are priced significantly lower as compared to U.S. domestic steel prices, with domestic steelmakers contending that these steels are priced unfairly low and have petitioned regulatory authorities for the imposition of punitive duties on these imports. The final determination of antidumping duties will occur later in 2016. As a result of competition from these imports, pricing and shipments for ArcelorMittal’s NAFTA business segment have fallen considerably. The NAFTA business segment witnessed 21% and 14% year-over-year declines in shipments and realized prices respectively, as a result of the adverse business conditions. [1]
In addition to competition from Chinese steel exports, the weakening of global currencies against the U.S. Dollar adversely impacted realized prices for ArcelorMittal’s international steelmaking operations. Realized prices (in Dollar terms) for ArcelorMittal’s Brazil, Europe, and ACIS (Africa and Commonwealth of Independent States) divisions declined 29%, 21%, and 35% respectively on a year-over-year basis in Q4, negatively impacting margins. [1]
Weak Iron Ore Prices Weigh on Results of Mining Division
Iron Ore Prices, Source: Y Charts
The sharp decline in iron ore prices over the last twelve months (as illustrated by the chart shown above) has adversely impacted the results of ArcelorMittal’s Mining division. Reference iron ore prices for ArcelorMittal’s iron ore sales were around 37% lower on a year-over-year basis in Q4 2015. [1]
A global supply glut, resulting from weak demand for iron ore from China in the face of rising global production has adversely affected prices of the commodity. The Chinese steel industry purchases nearly two-thirds of the global seaborne iron ore supply. [3] Since iron ore is used as a raw material in the production of steel, the demand for steel is a reflection of the demand for iron ore. As per World Steel Association estimates, the domestic demand for steel in China is expected to decline for the third consecutive year in 2016, largely as a result of slowing economic growth in the country. [4] Rising production from iron ore majors despite weakness in demand has increased global supply, resulting in an oversupply situation. The surplus of seaborne iron ore supply is expected to rise to 97 million tons by 2018 from an expected surplus of 65 million tons in 2016. [5] This is likely to limit the upside for iron ore prices in the near term.
Cost and Debt Reduction
As a result of the challenging business conditions facing ArcelorMittal, the company management has identified lowering costs and debt as important areas to focus upon. The company slashed capital spending to $2.7 billion in 2015 from $3.7 billion in 2014. [6] In addition, the company management has stated that debt reduction will remain at the forefront of the company’s plans. ArcelorMittal’s net debt stood at $15.7 billion at the end of Q4 2015, largely unchanged from the same period last year. [6] With the challenging business conditions impacting the global steel industry expected to persist in the near term, the company’s focus on cost and debt reduction will stand it in good stead.
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Notes:
- ArcelorMittal’s Q4 2015 Earnings Release, Seeking Alpha [↩] [↩] [↩] [↩] [↩]
- India Plans Price Curbs to Stem Chinese Steel Import Deluge, Bloomberg [↩]
- China Plans Iron Ore Subsidy for Miners Amid Rout, News Says, Bloomberg [↩]
- Short Range Outlook 2015-2016, World Steel Association [↩]
- Iron Ore Outlook Cut by Morgan Stanley as Supply Floods Market, Bloomberg [↩]
- ArcelorMittal’s Q4 2015 Earnings Presentation, ArcelorMittal Website [↩] [↩]