ArcelorMittal Shines To $22 As Americas Offset Europe’s Dip

May 16th, 20125:28 pm @


ArcelorMittal released its first quarter earnings last Thursday, with a greater than expected drop in earnings as a recovery in the U.S. steel market wasn’t enough to offset sluggish European demand. Overall revenues were flat at $22.7 billion while EBITDA declined by about 23% to $1.97 billion. In line with expectations, overall shipments grew by a meager 1%. [1] The company’s results followed strong earnings posted by the U.S. competitors U.S. Steel and Alcoa.

We have revised our price estimate for ArcelorMittal from $23 to $22, implying a premium of about 40% to the current market price. The revision primarily reflects a modest reduction in our pricing forecast.

See our full analysis for ArcelorMittal

Steel Prices in Europe Take a Hit

The uncertain economic outlook in Europe has left the company struggling with weak demand in the region. The flat carbon steel Europe division saw average steel selling prices down by about 7%. Steel shipments, however, increased to about 7.5 million tons primarily due to strong exports.

While in the near-term the European economic situation poses a significant risk to ArcelorMittal as it derives close to 35% of its revenues from Europe, we forecast steel shipments to increase in conjunction with an eventual economic recovery.

Recovering Demand in Americas

In the flat carbon Americas segment, ArcerlorMittal reported a significant increase in EBITDA of 20% as steel prices increased on the back of recovering demand in the U.S. Average prices improved by 5%, whereas shipments grew about 1.5%. Improved consumer sentiment in the country boosted automotive and appliance sales. We expect that North American shipments and prices will remain relatively stable going forward, absent an unforeseen shock to the U.S. economy.

Due to the aforementioned factors, the company’s flat carbon division witnessed a light decline in shipments which, coupled with flat prices, translated into a decline in profitability. However going forward we expect the segment, which is still the company’s biggest source of value, to recover and show steady growth.

CIS Weighs Down African Growth

ArcelorMittal’s steel shipments in its Asia, Africa and the Commonwealth of Independent States division increased primarily due to improved market demand in Africa. However, profitability took a hit as pricing pressure in the CIS more than offset improvements in Africa.

Even as we expect healthy growth from the AACIS business, we are closely watching for developments in South Africa as the country’s government frowns upon the company’s dominance in the market and mulls ways to reduce the company’s clout.

Iron Ore Prices A Drag On Mining Earnings, Focus Intact

The first quarter was marked by a slump in iron ore prices compared with the prior year’s quarter. This more than offset the growth in mining production, which translated into a steep decline in earnings.

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