Quae nocent, docent schreef op 5 december 2014 09:09:
Why There Will Be No Respite For ArcelorMittal Going Forward
Dec. 3, 2014 6:29 PM ET | 1 comment | About: ArcelorMittal (MT)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
An expected decline in iron ore pricing will continue to weigh on ArcelorMittal's earnings.
Increasing use of aluminum in the auto market presents yet another challenge for ArcelorMittal.
Investors should also watch ArcelorMittal's huge debt load and weak short-term liquidity.
ArcelorMittal's (NYSE:MT) weak performance in 2014 doesn't come as a surprise. The stock has dropped 31% so far in 2014 as its mining business has weighed on results. ArcelorMittal's mining business accounts for around 20% of its bottom line, but contributes just 7% to sales. As such, this segment is a key generator of earnings for the company. However, as iron ore prices are falling, ArcelorMittal is finding it difficult to make a sustained comeback.
Iron ore weakness will weigh on its earnings
As reported by Reuters, "The spot benchmark Asian iron ore price has fallen by about 40% this year to below $80 a tonne, prompting ArcelorMittal in August to cut its 2014 group profit estimate." In addition, the company is also suffering due to issues in Liberia, where its mining operations have been severely affected by the Ebola outbreak. As a result, this particular project is progressing at a much slower rate than anticipated.
However, it needs to be noted that since the cost of mining iron ore is around $30 per ton (WSJ registration required at the link), as per the Wall Street Journal, ArcelorMittal's mining operation is still profitable. But then, it is expected that iron ore prices will decline further (via Bloomberg):
Iron ore prices will plummet to less than $60 a metric ton next year as global supply increases and demand remains weak, according to Citigroup Inc., which slashed its quarterly forecasts for 2015 by as much as 23 percent.
Aluminum usage in the auto industry is another challenge
ArcelorMittal will find it difficult to improve its bottom line going forward. On the other hand, conditions in the steel market might not help ArcelorMittal much either. The automotive industry is a key end-user of steel, accounting for 16% of global consumption. However, the U.S., which is the world's second-largest auto market, will gradually shift to aluminum instead of steel for vehicle construction.
The U.S. government has issued a mandate for automakers to increase the corporate average fuel efficiency (CAFE) of their vehicles. To achieve this, automakers are planning to go for all-aluminum bodies that will reduce weight by around 30%, and consequently lead to better mileage figures. Luxury car makers have been using all aluminum bodies for some time, but the recent announcement by Ford (NYSE:F) to launch an all-aluminum body F-150 pickup truck indicates automakers are willing to use aluminum beyond the luxury segment.
As more automakers decide to use aluminum, the steel industry's prospects will take a hit and weigh on ArcelorMittal's performance. The company has tried to come up with a solution for this problem.
Recently, ArcelorMittal launched a new product, known as Fortiform. As per the company:
This new range of cold-formable advanced high-strength steel complements our existing range of products, including the hot-formable Usibor. Combined, these steels are offering compelling lightweighting solutions for our automotive customers.
This seems to be a promising solution, but we need to wait to see whether automakers are actually buying this product or not.
A huge debt that will keep earnings under pressure
In light of the challenges that ArcelorMittal is facing, the company has adopted a restructuring strategy to decrease its debt burden and streamline operations. As a result, it is selling its interest in Gallatin Steel to Nucor for $770 million, which is expected to close by the end of this year. This is a part of its strategy to sell non-core assets and eventually reduce debt.
However, ArcelorMittal's debt is still pretty huge at $21.87 billion, which means interest expenses will continue eating into its profits. In comparison, it has cash of just $4.18 billion. The company's current ratio is weak as well at just 1.32, signifying weak short-term liquidity. Additionally, the company has a bad track record as far as profitability is concerned, as its bottom line has dropped at a CAGR of 50% in the last five years. All in all, considering the points discussed in this article, there is a possibility that ArcelorMittal shares might drop further as the company faces pressure in both the steel and mining markets.