ArcelorMittal’s Q2 Earnings Preview: Weak Market Conditions For Iron Ore And Steel To Negatively Impact Results

by Trefis Team
Rate   |   votes   |   Share

ArcelorMittal (NYSE:MT), the world’s largest steel producer, will announce its second quarter results and conduct a conference call with analysts on July 31. [1] We expect the company to report weak earnings in Q2, given the sharp decline in iron ore prices over the last twelve months and weak market conditions for steel in North America. The decline in iron ore prices will negatively impact realized prices and margins for ArcelorMittal’s Mining division, its most profitable operating segment. In addition, a surge in steel imports to the U.S. is likely to negatively impact the results of the company’s North American operations. Furthermore, the strengthening of the U.S. Dollar against global currencies is likely to impact price realizations for most of ArcelorMittal’s steelmaking divisions, with the majority of the company’s steelmaking operations located in international jurisdictions. However, the company’s cost optimization initiatives are likely to partially offset the negative impact of weak market conditions for steel and iron ore on the company’s earnings. In Q1 2015, the company’s closely-watched earnings before interest, taxes, depreciation, and amortization (EBITDA) figure fell around 21% year-over-year to $1.38 billion. [2] In this article, we will take a look at what to expect from ArcelorMittal’s Q2 results.

Iron Ore Prices

ArcelorMittal’s iron ore shipments are either transferred to its steel producing divisions on a cost-plus basis or sold at market prices, either to third parties or to the company’s steel producing divisions. The company is raising its proportion of market-priced iron ore shipments. Market-priced shipments accounted for 53% of the company’s iron ore shipments in 2012. [3] This figure rose to 59% and 62% in 2013 and 2014, respectively. [4]

Iron ore is an important raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining its prices. Benchmark international iron ore prices are largely determined by Chinese demand, since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. [5] Chinese steel demand growth is expected to decline by 0.5% in 2015, following on from a 3.3% decline in 2014. [6] Weak demand for steel has indirectly resulted in weak demand for iron ore.

On the supply side, an expansion in production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. [7] The worldwide surplus of seaborne iron ore supply is expected to rise to 300 million tons in 2017, from an expected surplus of 175 million tons in 2015, and a surplus of 72 million tons and 14 million tons in 2014 and 2013, respectively. [8] A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term. The trajectory of iron ore prices over the course of the last twelve months is illustrated by the chart shown below. Subdued iron ore prices will weigh on the results of the company’s Mining division in Q2.

Iron Ore Prices, Source: Y Charts

Steel Demand and Prices

The U.S. domestic steel industry has been negatively impacted by a sharp increase in cheap steel imports. Two important reasons for the increase in steel imports are a sharp increase in Chinese steel exports and the strengthening of the U.S. Dollar against global currencies, which has made imports cheaper in Dollar terms. The penetration of finished steel imports as a percentage of the U.S. domestic steel market increased to 28.1% in 2014, up from 23.2% in 2013. [9] The increase in steel imports is likely to negatively impact realized prices and shipments for the company in North America. In addition to the competition from steel imports, prevailing demand conditions for steel in North America are fairly subdued, with the World Steel Association expecting steel demand in the North American Free Trade Agreement (NAFTA) region to decline by 0.9% in 2015. [6] This is partly due to the high base effect, with demand increasing by 12% in 2014, which was higher than expected. [10] Thus, weak market conditions for steel in North America are likely to negatively impact the results of the company’s NAFTA business segment.

We expect the company’s steel shipments to rise in Europe, given firming demand for steel in the region. As per World Steel Association estimates, steel demand is expected to grow at 2.1% in 2015 in the Eurozone. [6] However, pricing for the company’s European steel shipments, as well as earnings for the division, are expected to remain under pressure as a result of the depreciation of the Euro against the Dollar. In Q1 2015, the results of this division were negatively impacted by a sharp fall in realized prices, which fell 22% year-over-year, to $633 per ton, primarily due to the depreciation of the Euro against the Dollar. [2] The strengthening of the Dollar is expected to negatively impact the results of the company’s European operations, which account for nearly half of the company’s revenues, in Q2 as well. A strong Dollar will also negatively impact the company’s other international operations in South America and Africa.

ArcelorMittal’s cost optimization efforts will offset some of the negative impact of the challenging business environment on the company’s quarterly results. The company realized cumulative savings of $2.1 billion in 2013 and 2014. It is maintaining its emphasis on cost reduction with another $900 million in savings targeted for 2015. [11] However, given the challenging business conditions facing ArcelorMittal, the company is expected to report weak Q2 results, despite its cost reduction initiatives.


View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research


  1. ArcelorMittal’s Financial Calendar, ArcelorMittal Website []
  2. ArcelorMittal’s Q1 2015 Earnings Release, SEC [] []
  3. ArcelorMittal’s 2013 20-F, SEC []
  4. ArcelorMittal’s Q4 2014 Earnings Release, SEC []
  5. China Ore Stockpiles Rise to Record on Financing Deals, Bloomberg []
  6. Short Range Outlook 2015-2016, World Steel Association [] [] []
  7. BHP, Rio Gamble with Stacked Iron Ore Deck, Mineweb []
  8. Iron Ore Price Forecast Cut by Morgan Stanley on Supply, Bloomberg []
  9. ArcelorMittal’s 2014 20-F, SEC []
  10. Short Range Outlook 2014-2015, World Steel Association []
  11. ArcelorMittal’s Q4 2014 Earnings Presentation, ArcelorMittal Website []
Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Be the first to comment!