ArcelorMittal: A High Risk, High Reward Play
Mar. 25, 2015 4:39 PM ET | 3 comments | About: ArcelorMittal (MT), Includes: BHP, NUE, X
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
The Steel and Iron ore industries have been hit by overcapacity, over investment and tumbling prices.
Steel has also been hit by recent reports that Aluminum is cutting into its share as the material of choice for automakers.
The steel industry has accepted the challenge from Aluminum and has hit back with increasingly aggressive R&D and marketing of advanced high strength steels.
With expected quantitative easing, Europe is expected to get back on its growth trajectory with all the member states expected to grow this year.
The company can be expected to weather this down cycle and thrive when prices start rising.
ArcelorMittal SA (ADR) (NYSE:MT) is the world's largest vertically integrated steel making company. This sounds quite impressive, but it exists in a highly fragmented industry and produces about 6 % of the world's steel output. It has an industrial footprint in 22 different countries spread across four different continents having 56 integrated and mini-mill steel making facilities. It also mines a substantial amount of raw materials in the form of iron ore and coal primarily for use in its steel making plants; although in recent years, it has been selling its mineral output to others to an increasing extent. It has a diversified portfolio catering to all steel sectors including automotive, appliance, engineering, construction, energy and machinery. Since 2008, it has been in a major bear market with a decline of almost 90% from its all time highs of $101.56 per share. This article will look into the existing challenges and potential upsides to this company.
Challenges
Excess Capacity
According to the OECD, the world steel making capacity more than doubled from 1,060 million metric tonnes in 2000 to an estimated 2,241 million metric tonnes in 2014. And although demand for steel has moderated considerably compared to the previous decade, governments are still promoting and companies are still significantly investing in new projects leading to potential prolonged overcapacity. According to a policy paper released by the OECD in January of 2015, global steel making capacity is expected to increase to 2,361 million metric tonnes in 2017, an increase of roughly 5.5% from 2014. Most of this increase is coming from non OECD countries.
World crude steel capacity (nominal) and demand
(Source: OECD (2015), "Excess Capacity in the Global Steel Industry and the Implications of New Investment Projects", OECD Science, Technology and Industry Policy Papers, No. 18, OECD Publishing. It can be accessed here.)
As the figure indicates, immediately after the financial crisis there was a substantial drop in steel demand, but companies kept on maintaining and increasing capacity. The monthly capacity utilization for steel production stood around a solid 91 % just before the crisis, and is now below 80 %, leaving plants with a lot of excess capacity. Despite this fact, new capacity is still being added.
Demand moderation has primarily come from a massive overhang from the Chinese construction and infrastructure boom in the last decade. China has been the largest producer of steel for a long time and now produces roughly about half of the world's total production. On the demand side, Chinese consumption was increasing at a breakneck speed of 25 % around 2000 and lasted for most of the decade. Large capital investments were made by local companies in order to meet this demand. Since 2009 however, demand growth has slowly dwindled and is projected to be negative or less than 1% in 2015. Production however, has not subsided and significant amounts of this cheaply produced steel are now being exported to the ArcelorMittal strongholds of United States and Europe putting downward pressure on steel prices. In January of this year alone, Chinese steel exports increased 63 % over January of last year, which was again a 59 % increase over the previous year.