WHAT HAS CHANGED?

1. Latest Earnings Performance
   • ArcelorMittal reported total revenue of $16.6 billion in Q3 2019, which marks a decline of 10% compared to the previous year period. Lower revenue was driven by lower average steel selling prices, lower steel shipments and lower market-priced iron ore shipments, offset in part by higher seaborne iron ore reference prices. Company reported a loss of $0.53/share in Q3 2019 compared to a profit of $0.88/share in the year-ago period. Deterioration in bottom line was driven by lower steel price realization, decrease in volume and higher cost of sales in the form of elevated iron ore prices which has decreased margin per ton sold.

2. 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 which 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 the 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.

3. ArcelorMittal completes acquisition of Ilva
   • In November 2018, ArcelorMittal announced that AM Investco (in which ArcelorMittal holds 94.4% equity stake) has 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 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 significantly add to ArcelorMittal's current market share.

4. China's industrial production curtailment
   • China has imposed strict regulations on its domestic production of steel in order to control its alarming levels of pollution prevalent in the country. China plans on reducing 150 million tons of steel production capacity by 2020 and has already shed 115 million tons of steel capacity between 2016 and 2017. A decline in global steel supply has boosted steel prices and also reduced China's export position as the majority of its production is domestically consumed given the country's steady growth position. However, the recent US-China trade war led to a drop in steel prices. But the winter cuts in China has provided some support to the prices. This is expected to remain beneficial for the overall global steel market.

5. Potential impact of the federal government's infrastructure plan
   • The U.S. government has planned a ten year $1.5 trillion overhaul of domestic infrastructure, with a particular focus on transportation infrastructure. The implementation of this infrastructure plan, once it has been passed by Congress, is expected to sharply boost the demand for steel in the U.S. This should boost the business prospects of ArcelorMittal's NAFTA division.

6. $5.5 billion New Revolving Credit Facility
   • ArcelorMittal signed a new $5.5 billion Revolving Credit Facility, with a 5-year maturity plus two one-year extension options. The new facility will replace the existing RCF of the company. The new RCF provides ArcelorMittal with considerably improved terms over the previous one, and most importantly it extends the average maturity date by three years. Thus, a better debt maturity profile will reduce the pressure on the company's cash and will provide it with resources for further expansion.

7. Share Repurchase Program
   • On February 7, 2019, ArcelorMittal announced a share buyback program under which it will repurchase 4 million shares for an aggregate amount of approximately $113 million. This program, which the company plans to complete by December 2019, is expected to provide support to ArcelorMittal's stock price.

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 12% in 2018 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 15% 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 13% 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 and we expect the Average Steel Price in NAFTA to rise 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 $870 per ton by the end of the forecast period, it would represent a downside of 1% to our price estimate.

BUSINESS SUMMARY

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 32% of the company's value. It is valuable for the following reasons:

European division

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.

KEY TRENDS

Overcapacity in the steel industry

Overcapacity in the steel industry has hit margins for many operators, as steel mills globally are running at around 70% 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. However, we have seen a rise in capacity utilization at steel firms since Q4 2018. As demand bounced back, market expected a recovery in margins for the likes of ArcelorMittal. However, with economic slowdown in China persisting (GDP growth fell to a 27-year low), lower construction activity has led to decrease in demand for steel from China, which has in turn led to drop in global price levels

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