ArcelorMittal has sustained its share of short steel price cycles, compressed margins from strapped raw material supplies, and inconsistent order rates in the last three years. A surge in steel prices and positive signals in end-market demand led to a promising start in 2011, but this was short-lived as Europe tipped into recession in the latter half of the year. With about 40% of sales in Europe, 2012 was a very difficult year for the company and management is cautious about any improvement for 2013.
Steady demand in North and South America, lower input costs, divestitures of noncore assets, and the benefits of overhead cuts and the asset optimization plan will help cash flow and margins, but visibility is still low and it will be several years until midcycle profitability is restored.
|Economic Moat||Fair value||Stewardship Rating|
Basismaterialen - staal
KEY INVESTMENT CONSIDERATIONS
- Management cut the dividend for 2013, suggesting that earnings may not have bottomed yet.
- No change has been made yet to the outlook for the asset optimization program, sustainable cost reductions, or capital spending, but we believe these are all at risk in 2013.
- Even with current steel prices at prerecession levels, tons sold in the developed world is unlikely to fully recover until 2015 or later and drastic permanent capacity reductions in Europe may mean consumption will never recover to its prior peak in the region.
- Product, end market, and geographic diversification lower the company's exposure to any isolated areas of market weakness.
- The company's significant vertical integration lowers raw material costs and reduces earnings volatility.
- A history of successful merger integration ensures confidence in the company's acquisition strategy and increases the likelihood that ArcelorMittal will be selected as the preferred bidder in future acquisition efforts.
- The global steel industry is still highly fragmented. Even as the largest steelmaker in the world, ArcelorMittal only has about 8% market share.
- Operating in developing countries with challenging political and economic environments adds risk.
- ArcelorMittal has been unable to achieve a leading presence in China, home to half of the world's steel consumption.
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