ArcelorMittal (NYSE:MT) released its first-quarter earnings on May 10. The company reported revenues of $19.7 billion down 13% from $22.7 billion in Q1 2012. Accordingly, the closely watched EBITDA figure fell 26% year-over-year to $1.57 billion. The lower sales and EBITDA figures were due to lower shipments and selling prices. Steel shipments fell by 5.7% year-over-year to 20.95 million tonnes. ArcelorMittal reported an overall net loss of $345 million but reiterated its full-year guidance for 2013, assuming that iron ore prices retain their 2012 levels at $130/tonne and margins of steel prices over raw material costs also remain the same as last year’s [ArcelorMittal Q1 2013 6-K, SEC].
For the last few months, the company has been concentrating on reducing its debt, selling off non-core assets, idling excess production capacity and cutting costs across divisions. This was essential because all major rating agencies had downgraded its debt rating to junk, increasing its cost of borrowing for capital intensive businesses [ArcelorMittal Q1 2013 Earnings Conference Call, Seeking Alpha].
Performance Across Major Segments
- Flat Carbon Steel shipments in North and South America for Q1 2013 were 5.5 million tonnes, 0.5% higher than Q4 2012, driven primarily by higher shipment volumes in North America due to improving automotive demand. Sales were $4.9 billion for Q1 2013, an increase of 3.8% compared to $4.7 billion for Q4 2012. Sales were higher due to higher steel selling prices in South America and Mexico. This business segment contributed to around 25% of ArcelorMittal’s revenues.
- Steel shipments from the Flat Carbon Europe segment for Q1 2013 were 6.9 million tonnes, an increase of 15.7% compared to 6 million tonnes for Q4 2012. The marginally higher steel shipments were due to a mild pickup in demand following a seasonally weaker period. However, it doesn’t mean that the demand from the region has started recovering after the sovereign debt crisis. The marginally lower price of $831/tonne compared to the previous quarter’s price of $847/tonne bears this out. This business segment contributed to about 35% of ArcelorMittal’s revenues.
- Long Carbon Americas and Europe segment steel shipments for Q1 2013 were 5.4 million tonnes, 2.7% lower compared to 5.5 million tonnes for Q4 2012. Lower shipments were due to lower sales volumes in Europe, Mexico and the tubular products segment. Sales for the quarter were also lower at $5.1 billion compared to Q4 2012. This was on account of lower shipments and not weaker prices. The impact of prices was neutral as the positive impact from higher average steel selling prices across all key markets in this segment was offset by lower prices in the tubular steel business. The share of this business segment in the company’s revenues was around 25%.
Steps To Reduce Debt And Boost Profits
At the end of the first quarter, ArcelorMittal reduced its debt to $18 billion from the previous quarter’s ending figure of $21.8 billion. The company is aiming to reduce net debt to below $15 billion in the medium term. Apart from an increase in capital, this reduction is to be achieved by proceeds from a partial stake sale of 15% in its Labrador Trough iron ore mine in Canada. The expected proceeds from this transaction stand at $1.1 billion. (Is ArcelorMittal’s Stake Sale In Canadian Mine Part Of Its Bigger Plan?, Trefis)
The debt is expected to come down to $17 billion by mid-2013. Further reductions will be achieved by the generation of free cash flows [ArcelorMittal Seeks $3 Billion Cost Cuts as Steel Recovers, Bloomberg].
ArcelorMittal has set itself an ambitious target of raising EBITDA per tonne of steel from $87 to $150 in the next two-three years. This is expected to be achieved through a combination of asset optimization, an increase in shipments, growth in the mining business, management gains and higher utilization rates at its facilities. (Jefferies First Annual Spring Steel & Metals Summit, Chicago, ArcelorMittal Website)
ArcelorMittal claimed that it would be able to boost its profits in the remaining part of 2013 through a 2% rise in steel shipments, a 20% rise in iron shipments and benefits from asset optimization plans and management gains initiatives.
The company expects demand from North America and the European Union to recover by around 40 million tonnes over the next five years. For 2013, it expects 3-3.5% overall growth in demand. The highest growth is projected to occur in Brazil and China [ArcelorMittal Q1 2013 Earnings Presentation, ArcelorMittal Website].
We think that ArcelorMittal’s assumptions about iron ore prices and margins retaining their 2012 levels are too optimistic. Growth in China, the world’s biggest consumer of iron ore and steel, has weakened in the first four months of 2013 and the prognosis for the rest of the year isn’t too bullish either. Demand from Europe, by the company’s own admission, is expected to show an overall decline for the year. While the automotive and construction sectors in the U.S. have been picking up, demand from here may not be sufficient to meet ArcelorMittal’s expectations.
We have a price estimate for ArcelorMittal of $16, which will be revised shortly now that the first quarter earnings results have been declared.
Disclosure: No positions