- Brazil constitutes 27% of the Trefis price estimate for ArcelorMittal's stock.
- Europe constitutes 26% of the Trefis price estimate for ArcelorMittal's stock.
- Mining constitutes 20% of the Trefis price estimate for ArcelorMittal's stock.
WHAT HAS CHANGED?
- Q2 2022 Earnings
- ArcelorMittal posted a stronger than expected set of Q2 2022 results. While revenue rose by about 14% to $22.1 billion, driven by higher price realizations for steel, net income fell marginally to $3.92 billion due to rising costs. However, the company's EPS rose to $4.25, up from $3.47 a year earlier, driven by the company's share repurchases. However, the company has indicated that there are multiple risks going forward, including surging inflation, the possibility of a global slowdown, and China's Covid-19 restrictions.
- 2021 Results
- In 2021, ArcelorMittal reported 69 million tons of total steel production against a total capacity of 82.7 million tons. Despite a strong recovery reported in Europe, Brazil, and South Africa regions, the total production stood relatively flat compared to the prior year, largely due to the acquisition of ArcelorMittal USA by Cleveland-Cliffs. Per annual filings, the company reported 33 million tons of steel shipments to Europe. Comparing it with Europe’s apparent steel consumption of 149 million tonnes (164 million tons) reported by EUROFER (The European Steel Association) – MT accounts for nearly a fifth of Europe’s consumption. In Q1 2022 filings, the company revised its apparent steel consumption outlook for Europe downwards due to rising inflation and uncertainty associated with the Russia-Ukraine war.
- Comparing ArcelorMittal’s outlook with EUROFER
- Per Q1 filings, the company expects Europe’s apparent steel consumption to decline by between -4% to -2% in 2022. While EUROFER also projects a -2% (y-o-y) decline in ASC for 2022, the forecast is bullish for 2023 with an expected growth of 5.1%. However, the construction and automotive industries, which account for 35% and 18% of total steel consumption, respectively, are likely to retain strength despite the ongoing repercussions of the war. With residential investments and public-funded construction projects picking up pace in 2021, EUROFER projects construction output to grow by 2.3% in 2022 and 1.5% in 2023. After observing a severe contraction in 2020, the automotive industry reported a modest rebound of 4% in 2021. Given the continued depressed demand for passenger vehicles, the sector is likely to post feeble numbers in 2022.
- 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.
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. In 2021, the margins increased sharply to 25% due to rising steel prices. We expect margins to decline slightly in the near future before rising and stabilizing at 13% by the end of the forecast period. However, if margin improvement is better than anticipated and the division's margins improve to 20% 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. Steel prices increased sharply to $1128 per ton in 2021. We expect the Average Steel Price in NAFTA to be close 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.