Why analysts are questioning ArcelorMittal’s mining capex

Market Realist

Overview: ArcelorMittal was disappointed with its 2Q results (Part 7 of 9)

(Continued from Part 6)

ArcelorMittal’s mining capex

Iron ore is a key raw material of any steel company. After the global financial crisis, ArcelorMittal placed a lot of emphasis on raw material security for its steel plants. The company acquired and developed several iron ore and coal mines to fulfill its raw material requirements. While a stable and secure raw material supply should have been a boon for ArcelorMittal, the actual result has been the opposite.

The performance of the mining business

The results of the mining business were below the last quarter results, as well as the second quarter of last year. While the sales have increased because the steel shipments at ArcelorMittal have been growing, the earnings before interest, taxes, depreciation, and amortization (or EBITDA) has come down sharply. The EBITDA came in at $388 million, which was down 10% from 2Q13. This has been mainly due to the falling iron ore prices.

It’s important to note that raw material prices are a key driver for steel makers like ArcelorMittal (MT), U.S. Steel Corporation (X), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS). The steel industry can also be accessed through the SPDR S&P Metals and Mining ETF (XME).

Why Wall Street isn’t impressed with ArcelorMittal’s mining business 

Over the past several quarters ArcelorMittal has undertaken expansion projects at several of its mining locations. The consensus on Wall Street is against such investments. The analysts are questioning the rationale of such investments at a time when the steel prices are falling. There is no respite coming in the short term, as major producers are in the process of increasing their capacity further. The previous chart shows the planned capacity increases by major iron ore miners, along with the trend in iron ore prices. While ArcelorMittal management is maintaining that they’re factoring even lesser iron ore prices while making these mining investments, the market isn’t impressed.

We’ll analyze the share price movement and market sentiment for ArcelorMittal in the next section.

Continue to Part 8

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