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Investment Overview for ArcelorMittal (NYSE:MT)
- Potential impact of the federal government's infrastructure plan
- The U.S. government has planned a ten year $1 trillion overhaul of domestic infrastructure, with a particular focus on transportation infrastructure. The implementation of this infrastructure plan, once it has been passed by Congress, is expected to sharply boost the demand for steel in the U.S. This should boost the business prospects of ArcelorMittal's NAFTA division.
- Imposition of antidumping duties on steel imports into the U.S.
- Steel imports into the U.S. have risen sharply over the course of the past few years. The penetration of finished steel imports as a percentage of the U.S. domestic steel market increased to 29.3% in 2015, up from 28.1% and 23.2% in 2014 and 2013, respectively. A significant proportion of U.S. steel imports are from developing countries which have low labor costs and low overall costs of production. Competition from these low-priced imports negatively impacted shipments and realized prices for the domestic steel industry. Domestic steelmakers filed antidumping petitions with U.S. trade authorities, contending that these imported steels were priced unfairly low. U.S. trade authorities imposed antidumping duties on a large proportion of these imported steels in 2016. The imposition of antidumping duties on steel imports should help boost the prospects of the domestic steel industry going forward, including the North American operations of ArcelorMittal.
- Pressure on Chinese steel exports
- Major trading partners for Chinese steel exporters such as the U.S. and the EU have imposed antidumping duties on steel imports from China, in order to curb the exports of unfairly traded steel from the country. In addition, domestic demand for steel in China has received a boost from the Chinese government's fiscal stimulus aimed at enhancing domestic infrastructure spending, which could lower the need for Chinese steel producers to export excess steel production. Thus, Chinese steel exports, which fell around 4% from 2015 levels in 2016, could decline further in 2017.
Below are key drivers of ArcelorMittal's value that present opportunities for upside or downside to the current Trefis price estimate for ArcelorMittal:
The NAFTA division
- NAFTA EBITDA Margin: Margins in the NAFTA division declined from 10.9% in 2012 to about 3.4% in 2015, due to competition from imported steels adversely affecting the division's shipments and pricing. Margins recovered sharply to 16.7% in 2016 as a result of the company's cost reduction initiatives, a change in the product mix towards higher value steels and regulatory action taken by U.S. trade authorities against unfairly traded steel imports. We expect margins to improve further and stabilize at 18.2% by the end of the forecast period, driven by regulatory action taken by U.S. authorities and improved demand conditions. However, if margin improvement is better than anticipated and the division's margins improve to 19.2% by the end of the forecast period, it would represent an upside of around 3% to our price estimate.
- Average Steel Price in NAFTA: ArcelorMittal's Average Price of steel in NAFTA fell from $879 per ton in 2012 to $672 per ton in 2016 primarily due to the impact of competition from cheap steel imports negatively impacting steel prices in the U.S. With the implementation of antidumping duties on steel imports from several countries, we expect the Average Steel Price in NAFTA to rise to $802 per ton by the end of our forecast period. However, if the improvement in pricing is less than anticipated, and the division's realized prices rise to only $750 per ton by the end of the forecast period, it would represent a downside of 4% to our price estimate.
ArcelorMittal is currently the largest steel manufacturer in the world and was formed by the merger of steel giants Arcelor and Mittal in 2006. The company produces nearly 100 million metric tons of steel annually and has operations in 20 countries on four continents.
Headquartered in Luxembourg, the firm operates its business in five main operating segments: Brazil, Europe, NAFTA, Africa and Commonwealth of Independent States (ACIS), and Mining. More than 35% of the steel produced is in the Americas, nearly 50% in Europe, and the remainder in countries such as Kazakhstan, South Africa, and Ukraine. ArcelorMittal produces a variety of flat products such as sheets and plates, and long products including bars and rods. The firm also produces pipes and tubes for various applications.
The NAFTA segment is the most valuable division for the firm, accounting for around 50% of the company's value. It is valuable for the following reasons:
The NAFTA division is characterized by strong underlying demand, driven by steady economic growth in the U.S. The division's shipments and pricing have been negatively impacted by competition from cheap steel imports. However, with U.S. trade authorities imposing antidumping duties on steel imports from a number of countries, the division's shipments and pricing are expected to recover over the forecast period.
Overcapacity in the steel industry
Overcapacity in the steel industry has hit margins for many operators, as steel mills globally are running at around 70% of their actual capacity on average. While this saves some costs, there are significant fixed costs that cause margins to compress when capacity is not optimal. As demand bounces back and capacity is optimized, we expect a recovery in margins for the likes of ArcelorMittal.
Increasing demand from emerging markets
As developing nations like China and India witness robust economic growth, the demand for steel in Asia is expected to grow at a healthy pace. This should help the steel industry solve its overcapacity issue to some extent, and allow manufacturers to eventually increase steel prices.
Economic recovery to drive demand
We expect that improving economic conditions in the U.S. and Europe will drive industrial demand, which should, in turn, provide a boost to prices as well as shipments.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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