Harsh Singh Chauhan
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ArcelorMittal: Why Investors Should Not Rule Out A Turnaround
Jun. 30, 2015 5:19 AM ET | About: ArcelorMittal (MT)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
•MT's EBITDA and cash flow has dropped of late due to weak steel pricing on account of cheap imports into its markets.
•The imposition of tariffs of almost 36% by the European Union will level the playing field for MT against cheap imports.
•A similar situation seems to be developing in the U.S. as the Commerce Department has opened an investigation against cheap imports, which will benefit MT going forward.
•MT's addressable market will increase due to positive construction and housing activity in Europe and North America, helping the company arrest the slide in its revenue.
Though ArcelorMittal's (NYSE:MT) financial performance has not been up to the mark recently, with the company missing analysts estimates in three out of four quarters, recent developments indicate that a recovery might be possible. More specifically, ArcelorMittal has struggled in the past year due to weakness in steel pricing as a result of cheap steel imports in its key markets in North America and Europe. As a result, the stock has lost more than 31% of its value in the past year.
What gives?
In fact, when ArcelorMittal released its latest results last month, the company's sales dropped 14% year-over-year, while its EBITDA dropped to $1.4 billion from $1.8 billion in the prior-year period. Additionally, the company's net loss had widened to $0.7 billion in the quarter from $0.2 billion in the prior-year quarter.
This has created a negative impact on the company's EBITDA and cash flow performance as well. This is shown in the following two charts:
Source: ArcelorMittal
The chart above depicts that ArcelorMittal's EBITDA dropped 20.1% in the first quarter of 2015 on a sequential basis, primarily due to steel pricing weakness and the impact of currency. Additionally, the company's EBITDA to free cash flow also dropped substantially in the quarter, as shown below:
Source: ArcelorMittal
However, there is a strong probability that the problems that ArcelorMittal is facing in its financial performance will gradually go away going forward due to favorable developments related to steel imports and improving manufacturing and construction activity in its end markets. Let's take a look.
Positive developments against steel imports in Europe and North America
Last month, ArcelorMittal shares gained some strength after an imposition of tariffs by the European Union on the import of electrical steel from countries such as China, Russia, Japan, South Korea, and the U.S. The rate of tariffs imposed goes up to as much as 35.9% for the import of grain-oriented electrical steel, which is used in power transformers.
Currently, the tariffs have been imposed for a period of six months on a provisional basis, but they can be in place for as much as five years once the investigation is completed in November. Now, it is likely that we can see an increase in the tariff imposition period, as the import of cheap steel from the above said markets has hampered European players. According to Euronews:
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"Imports reached about 45 percent of the market as their average price dropped by some 30 percent from 2011 to 2014.
Eurofer says dumped imports have damaged EU industry by driving prices to below the costs of production, causing substantial losses. It said the market share of dumped imports into the EU rose to 47 percent in 2012, worth some 150 million euros, with most from Japan and Russia."
Meanwhile, ArcelorMittal's subsidiary in the U.S, could also benefit from a possible imposition of anti-dumping tariffs. Earlier in June, six U.S. steel companies, including ArcelorMittal, had filed a petition against unfair dumping of steel from China and other countries. These six companies were of the opinion that an increase in the volume of cheaply-priced corrosion-resistant steel from China, India, Italy, and other countries over the past three years has hurt domestic producers.
Now, the Commerce Department has opened an enquiry into the matter. This is a positive indication for U.S. steelmakers, including the subsidiary of ArcelorMittal in the country, as the imposition of tariffs will make it difficult for imported steel to compete against indigenous producers. As reported by Seeking Alpha:
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"If illegal dumping is found, the sanctions are applied retroactively to the date that the trade case was filed, Morningstar's Andrew Lane says, adding that "importers would become more wary about importing goods that may be subjected to a retroactive tariff. Therefore the publicly traded domestic steel makers will see an uptick in the shipment volumes."
As a result, it is likely that ArcelorMittal's steel shipments in both Europe and the U.S. will improve going forward on the back of above-mentioned developments.
Improving steel usage in North America and Europe will be another tailwind
Looking ahead, ArcelorMittal also seems well-positioned to benefit from the growing demand for steel in its end markets. For example, in Europe, ArcelorMittal is of the opinion that on account of inventory destocking last year, demand for steel will improve. In fact, ArcelorMittal anticipates steel demand to grow 1.5%-2.5% this year.
This is not surprising, as demand for construction and automotive in the U.S. is anticipated to grow. As per Euroconstruct, new construction growth in Europe is expected to grow 10% over the next two years. At the same time, the civil engineering segment is also slated to increase at a rate of 3.1% in Europe. Since steel is a key component in construction, its demand will increase going forward in Europe, thereby increasing ArcelorMittal's addressable market.
Meanwhile, a similar demand scenario is emerging in the U.S., where both the housing and construction markets are strong. In fact, demand for new homes has increased at an incredible pace in 2015, recording 23% growth in the first four months of 2015. Looking ahead, U.S. housing demand is anticipated to rise another 30% in 2015, and then record growth in the range of 20%-25% next year. But, at the same time, U.S. housing supply is weak, which is why homebuilders are increasing their community count at an aggressive pace in order to meet demand.
Thus, ArcelorMittal will continue seeing strong growth in the North American market as well.
Conclusion
All in all, the end market conditions seem to be favoring ArcelorMittal. The company has struggled in the past year, but the imposition of tariffs in its key end markets and the growing demand for steel could help it make a comeback. Thus, in my opinion, ArcelorMittal is well-positioned going forward and the stock's drop in the past year looks like an opportunity in disguise
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