- Europe constitutes 29% of the Trefis price estimate for ArcelorMittal's stock.
- Brazil constitutes 27% of the Trefis price estimate for ArcelorMittal's stock.
- Mining constitutes 18% of the Trefis price estimate for ArcelorMittal's stock.
WHAT HAS CHANGED?
- Impact of Coronavirus
- ArcelorMittal's stock dropped more than 60% from its February 2020 high of $18 to $7 in March 2020 after the outbreak of the coronavirus pandemic. This was due to a drop in global steel prices and the supply constraints because of the lockdowns. However, ArcelorMittal stock has rallied from $7 to over $34 (as on 25th August 2021) off the recent bottom. The stock was able to beat the broader market over recent months as steel prices and recovered sharply over recent months and are expected to remain elevated in the near term. The US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat, and with the Chinese economy opening up, led to expectations of a rise in steel demand and reduction of supply constraints.
- Latest Earnings Performance - Q2 2021
- ArcelorMittal reported total revenue of $19.3 billion in Q2 2021, which marks an increase of 76% compared to the previous year period. Higher revenue was driven primarily due
to higher average steel selling prices (+61.3%), higher steel shipments (+8.1%), and significantly higher iron ore reference prices (+114%), partially offset by the impact of lower iron ore shipments (-33.5%). The company reported a profit of $3.47/share in Q2 2021 as against a loss of $0.50 in the previous year period.
- FY2020 Performance
- ArcelorMittal reported total revenue of $53.3 billion in 2020, which marks a decline of 25% compared to the previous year period. Lower revenue was driven by lower average steel selling prices and lower steel shipments. Volume declined on account of lower demand and supply constraints imposed by the lockdowns amidst the coronavirus pandemic. Lower demand also took a toll on price realization. The company reported a loss of $0.64/share in 2020. Bottom line was affected by lower steel price realization, decrease in volume, and higher cost of sales in the form of elevated iron ore prices.
- Sale of US operations to Cleveland-Cliffs
- ArcelorMittal stock increased 10.5% in a day on September 28, 2020. This was after the announcement of Cleveland-Cliffs' decision to buy ArcelorMittal’s US operations in a $1.4 billion cash and stock deal. This deal closed towards the end of 2020. The deal said that ArcelorMittal will receive over $500 million in cash upfront while the remaining portion will be almost a quarter share in CLF stock. After completing a $2 billion asset sale to reduce debt, this deal will help MT to repurchase shares with the $500 million cash proceeds (ArcelorMittal completed $650 million of share repurchases in Q1 2021). Also, this includes only the sale of its US assets, while MT will continue to serve North American markets with operations in Canada and Mexico. Thus, expectations of lower debt burden, gradual recovery in the steel market, and the new share repurchase program led to a 10.5% intra-day spike in MT’s stock after the deal announcement.
- Imposition of punitive tariffs 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 peaked at 34.4% in 2014 and 33.8% in 2015, gaining momentum throughout the years. A significant proportion of U.S. steel imports are from developing countries that 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. The U.S. Commerce Department under Pres. Trump's administration initiated a probe under section 232 of the Trade Expansion Act of 1962 to apprehend the impact of such imports on U.S. national security.
The recent positive findings of the probe have led to the imposition of 25% tariffs on U.S. steel imports. This has helped boost the prospects of the domestic steel industries, including the North American operations of ArcelorMittal.
- ArcelorMittal completes acquisition of Ilva
- In November 2018, ArcelorMittal announced that AM Investco (in which ArcelorMittal holds 94.4% equity stake) completed the acquisition of Ilva SPA. ArcelorMittal assumed full management control of Ilva, which will form a new business cluster with ArcelorMittal Europe - Flat Products and will be known as ArcelorMittal Italia. Ilva presents a significant growth opportunity for ArcelorMittal, especially in southern Europe, where its operations are currently limited. Ilva contains the largest-capacity single unit for producing hot-rolled coil in the whole of Europe, with a total nameplate capacity of 12 million tonnes per year, which is expected to add to ArcelorMittal's current market share significantly.
- Potential impact of the federal government's infrastructure plan
- The U.S. government has planned a $1.2 trillion overhaul of domestic infrastructure, with a particular focus on transportation infrastructure. The implementation of this infrastructure plan, once Congress has passed it, is expected to sharply boost the demand for steel in the U.S. This should boost the business prospects of ArcelorMittal's NAFTA division.
- $2.2 Share-Buyback Program
- ArcelorMittal will return the $1.2bn proceeds from the redeemed Cleveland Cliffs preference shares and has decided to advance $1bn as part of its prospective 2022 capital return to shareholders (equivalent to 50% of 1H 2021 FCF) as a share buy back program to be completed by the end of 2021
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
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 11% in 2020 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 decline slightly in the near future before rising and stabilizing at 8.4% by the end of the forecast period. However, if margin improvement is better than anticipated and the division's margins improve to 15% by the end of the forecast period, it would represent an upside of around 10% 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 anti-dumping duties on steel imports from several countries, prices have improved $852 in 2018 before dropping to $702 in 2020. We expect the Average Steel Price in NAFTA to rise closer to $900 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 $850 per ton by the end of the forecast period, it would represent a downside of 1% 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 has a production capacity of nearly 114 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 25% 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.
SOURCES OF VALUE
The European segment is the most valuable division for the firm, accounting for around 30% of the company's value. It is valuable for the following reasons:
The Europe division is characterized by strong underlying demand, driven by steady economic growth in Europe. The division's shipments and pricing have been negatively impacted by competition from cheap steel imports. However, with European trade authorities imposing anti-dumping 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 were running at around 50% of their actual capacity on average in mid-2020. While this saves some costs, there are significant fixed costs that cause margins to compress when capacity is not optimal. Capacity has improved over recent months and is closer to pre-Covid levels.