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Investment Overview for ArcelorMittal (NYSE:MT)
WHAT HAS CHANGED?
U.S. authorities have responded to petitions by domestic steelmakers to impose punitive tariffs on cheap steel imports from a number of countries, a development that has positively impacted the prospects of domestic steelmakers.
- Imposition of anti-dumping duties on steel imports
- Steel imports into the U.S. have risen sharply over the course of the last year or so. 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 sharp increase in Chinese steel exports and a strong U.S. Dollar have contributed to the increase in steel imports. A significant proportion of U.S. steel imports are from developing countries which have low labor costs and low overall costs of production. The rise in cheap steel imports had adversely affected shipments and realized prices for domestic steel producers. Domestic steelmakers contend that these imported steels are priced unfairly low and had filed antidumping petitions with U.S. trade authorities. The U.S. Department Of Commerce imposed preliminary antidumping duties on steel imports from seven countries including China. The preliminary ruling needs to be confirmed in the U.S. International Trade Commission's (ITC) final ruling, expected in August. However, regulatory intervention has positively impacted the prospects of the domestic steel industry, indicated by rising steel prices in the U.S.
- Weakness in Chinese demand for steel and rising steel exports
- The Chinese steel industry is currently facing weak domestic demand, primarily due to a slowing Chinese economy. However, production levels have not been adjusted in response to weakening demand conditions. As a result, the Chinese domestic steel market is currently characterized by an oversupply situation, which has provided a sharp boost to Chinese steel exports, which rose 7.6% year-over-year in the first four months of 2016. However, rising cases of trade protectionism globally against Chinese steel exports could retard the pace of growth of these steel exports.
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 9.9% in 2012 to about 2.4% in 2015, due to competition from imported steels adversely affecting the division's shipments and pricing. We expect margins to recover sharply from 2016 onwards as a result of favorable regulatory action vis-a-vis steel imports, the company's cost reduction initiatives and and the ramp up of production from additional production capacity. However, the combination of regulatory action, cost reduction initiatives and expanded production may not be able to deliver the envisioned margin improvement. If the division's margins rise to 12.2% by 2022, as opposed to 14.2% in the base scenario, it would represent a downside of around 15% 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 $732 per ton in 2015 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 $871 per ton by the end of our forecast period. However, if the improvement in the pricing environment is not as anticipated, and the division's realized prices rise to only $840 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 51% 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 preliminary antidumping duties on steel imports from a number of countries (with a final ruling expected in August), the division's shipment and pricing is expected to recover sharply 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 two-thirds 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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