ArcelorMittal’s (NYSE:MT) South African operations are in the news for all the wrong reasons as the country’s government frowns upon the company’s steel pricing power. It has taken several steps to reduce the company’s dominance in the market, and in an another blow to the world’s largest steel producer, the South Africa’s Competition Commission has directed the country’s competition court to levy a penalty on the company for colluding with other steel companies. Though we have not revised our estimates, it could however reduce the company’s product prices in South Africa which could weigh on future revenues.
Despite its emerging troubles in South Africa, improving business sentiment in the U.S. could give the beleaguered company a breather as it raises prices of some of the products in the country. ArcelorMittal’s product portfolio spans across a variety of flat products such as sheets and plates as well as long products including bars and rods. It mainly competes with steel giants like Alcoa (NYSE:AA) and U.S. Steel (NYSE:X). Our current price estimate for ArcelorMittal stands at $23, implying a premium of about 20% to the current market price.
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Troubles not just ending in South Africa
South Africa’s Competition Commission has indicted ArcelorMittal and several other small companies for colluding with each other and fixing the prices. About four years ago a complaint, alleging that these companies raised prices for steel products around the same time with similar percentage, was filed with the country’s authorities. ArcelorMittal could face a fine to the tune of 10% of its full year revenue from the unit or about $390 million based on its last year revenues. 
ArcelorMittal’s attracted the South African government’s wrath over its alleged misuse of dominant position in the market. The government has accused the company of involving in import parity pricing strategy. Last week, it barred the company from its preferential list for infrastructure procurement policy. Such moves will force the company to go for price cuts to retain the market share, which could have a substantial impact on our price estimate.
Hikes sheet prices in the U.S.
Some recent encouraging economic reports has provided some upside momentum for the steel industry in the U.S.. Steel is barometer of the economic health and volume growth is largely dependent on economic expansion. ArcelorMittal has raised hot rolled coiled prices by $20 per ton to $720 per ton in line with our expectations.  The flat carbon steel Americas division currently contributes to 22% of our price estimate of the company.Notes:
- ArcelorMittal’s S.Africa unit faces collusion fine, Reuters, April 2 [↩]
- ArcelorMittal USA bumps up steel coil prices $20/st: trade, Platts, April 2 2012 [↩]