ArcelorMittal Plans to Ramp up Mining Operations to Protect Margins
ArcelorMittal (NYSE:MT) second quarter earnings were robust with more than $25 billion in the revenues and $3.4 billion EBITDA. However, there are concerns on whether the company will able to replicate this success in the coming quarter as well if cost pressures from iron ore and coal further pressure margins. ArcelorMittal formed in 2006 by the merger of two steel giants (Arcelor and Mittal) and is by far the largest producer of steel in the world competing with other international steel companies like BaoSteel, POSCO (NYSE:PKX), Nippon Steel, Tata Steel and U.S. Steel (NYSE:X).
Our price estimate for Arcelor Mittal stands at $41.15. Below we take a look at our estimates for the company’s performance in the next year.
Company expects a seasonal dip in the third quarter
The northern hemisphere witnessed a seasonal dip in the second half of the year. This coupled with the fears of a overall slowdown will hurt the company. The company’s EBITDA for the next quarter could fall to the range of $2-2.4 billion if higher domestic steel production in China and tighter monetary policy negatively impact China’s overall demand for steel. Although a very small portion of company’s steel is shipped to China, the country plays a big role in driving the demand and prices for the commodity globally. The rising costs of the raw materials used in the production of steel, mainly iron ore and coal, are also a concern for the company in the near term.
Increase in iron ore and coal mining will benefit the company
In order to hedge the price rise of the major raw materials of steel production like iron ore and coal, the company has invested in iron ore and coal mining projects and aims to become self sufficient in steel production to hedge itself against the cost fluctuations of the raw materials. The company aims to achieve volume growth of 10 percent for iron ore and 20 percent for coking coal with higher prices and stable costs in 2011. The earnings for these operations will be provided separately in the 2011 annual results.