Why the slowdown in Brazil should bother ArcelorMittal investors

Market Realist

Overview: ArcelorMittal was disappointed with its 2Q results (Part 5 of 9)

(Continued from Part 4)

Slowdown in Brazil impacts

ArcelorMittal reported a drop in sales of 8% over the second quarter of 2013. The decline was largely led by a similar drop in shipments. The earnings before interest, taxes, depreciation, and amortization (or EBITDA) in the second quarter came in 22.3% lower over the same period last year. The major factors behind this drop were the steep fall in steel shipments and the costs associated with restarting one of its blast furnaces.

The importance of Brazilian operations

ArcelorMittal’s Brazilian operations are the most profitable for the company. While it accounts for only ~12% of the sales at ArcelorMittal, it contributes around a quarter of its EBITDA. The previous chart shows the trends in EBITDA per ton at various segments for ArcelorMittal. Historically, Brazil has had higher profitability when compared to other segments. The fall in margins in this region has impacted the overall profitability of ArcelorMittal.

The slowdown in Brazilian economy

The Brazilian economy has slowed down. The demand for steel has also slowed as the key steel consuming industries like auto and construction have stagnated. The auto industry body in Brazil has forecasted a 10% drop in auto sales in full year 2014. The construction industry has also slowed down, primarily as the after effect of the World Cup. The country was consuming a lot of steel for infrastructure creation to host the World Cup. The demand has gone away with the completion of the World Cup and the steel industry in Brazil has slowed down.

China also witnessed a slowdown in its steel industry as the rate of infrastructure creation slowed after it hosted the 2008 Olympics. The global steel industry is still reeling from the impact of Chinese slowdown and the resulting oversupply in global markets. Steel companies globally like ArcelorMittal (MT), U.S. Steel Corporation (X), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS) have been impacted by this slowdown. The SPDR S&P Metals and Mining ETF (XME) has also been hit by this factor as it seeks to invest in steel companies operating in the U.S.

Next we’ll analyze ArcelorMittal’s ACIS operations and look at its contribution to the company’s second quarter results.

Continue to Part 6

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