On Mar 4, we issued an updated research report on ArcelorMittal (MT). While growth opportunities arising from acquisitions and emerging markets as well as the company’s efforts to cut debt and reduce costs are encouraging, we remain concerned about weak steel industry fundamentals and a tough pricing environment.
The steel giant posted narrower loss in the fourth quarter of 2013, reported on Feb 7, thanks to lower impairment charges. Adjusted loss, however, was higher than the Zacks Consensus Estimate. Revenues rose year over year but missed expectations. Shipments also rose on a year over year basis in the quarter.
ArcelorMittal, a Zacks Rank #3 (Hold) stock, is expanding its steel-making capacity and raw materials self-sufficiency through a combination of brownfield growth, new greenfield projects and acquisition opportunities, mainly in emerging markets.
ArcelorMittal is also highly focused on reducing debt, lowering costs and improving efficiency. The company maintains its $15 billion medium-term net debt target. On the cost-saving front, ArcelorMittal is progressing with a new $3 billion cost optimization program that mostly focuses on variable cost reductions in its plants. The company achieved cost savings of $1.1 billion on an annualized basis in 2013 and expects $2 billion in savings by the end of 2014.
We are also encouraged by the company’s expansion initiatives in the mining segment. ArcelorMittal is progressing with its mining growth projects and is on track to boost iron ore production capacity in its own mines to 84 million tons by 2015. A second phase expansion in its operations in Liberia is currently underway with expected completion by end-2015.
However, ArcelorMittal continues to grapple with challenging economic conditions in Europe. It is also exposed to volatility in steel pricing and tough competition.
Increased domestic imports, production ramp ups by peers and increased Chinese production have led to oversupply in the steel industry, which in turn, is causing a decline in steel prices.
Moreover, demand for steel remains weak in Europe. Steel demand fell in Europe in 2013 is currently roughly 30% below pre-crisis levels. ArcelorMittal has closed some its operations in the region, given slack demand and the weak European economy. Recovery in the demand environment is expected to be sluggish in the region this year.
Key Picks from the Sector
Other companies in the steel and related industries with favorable Zacks Rank are AK Steel Holding Corp. (AKS), United States Steel Corp. (X) and Worthington Industries, Inc. (WOR), all with a Zacks Rank #2 (Buy).