Over the past couple of weeks, shares of ArcelorMittal (NYSE:MT) have gained strong momentum after it emerged on May 26 that the European Union could extend its investigation with regards to imports of hot-rolled coil steel. According to a report, the European Steel Association now wants the EU to extend its investigation to include more countries such as Russia, Turkey, Brazil, Ukraine, and Iran into its ambit.
This has sparked a rally in ArcelorMittal shares, which have gained more than 24% in just two weeks. As such, we will take a closer look at why the extension of the anti-dumping duty to more countries will prove to be a tailwind for ArcelorMittal, and whether the company is making enough operational improvements to take advantage of the possible improvements in the steel market.
Why the extension of the anti-dumping investigation is a tailwind
Earlier this year, the European Commission started investigating Chinese exporters that supply hot-rolled coil steel, which is used in a variety of applications ranging from automotive to construction. This investigation is said to be continuing as the European Steel Association requested the Commission to widen its investigation on Chinese exporters, who sold their steel products below costs and at throwaway prices in the EU, encouraged by subsidies in their homeland.
This investigation should turn out to be a blessing in disguise for ArcelorMittal as it gets around 50% of its revenue from the EU, which happens to be its biggest market by geography. As the investigation widens to more countries, ArcelorMittal will be able to compete more effectively with imported products that were earlier sold at cheap prices. This is because Chinese steel producing companies will not be able to dump or sell their steel at or below costs to gain market share in an improper manner.
Now, the EU had already imposed anti-dumping duties on imports of flat-rolled stainless steel from China and Taiwan last year, and in February this year, it was announced that it is investigating seamless pipes, heavy plates and hot-rolled flat steel imports from China. These moves have created a negative impact on Chinese steel imports into the European market.
As a result of these trade measures, Chinese steel exports for the month of April came in at 9.08 million tonnes, down 9% from the level in March. Looking ahead, as the investigation widens to more Chinese steel products and includes more countries, ArcelorMittal will be in a beneficial position given the revenue that it generates from Europe.
This is because ArcelorMittal's steel products will now be more competitively priced as compared to the cheap imports, which will get more expensive as duties are imposed, allowing the company to effectively tap the growing demand for steel in the region.
For instance, the demand for hot-rolled coil used in construction is improving in Europe due to weak oil prices and employment growth supporting consumer spending. After growing 1.5% on a year-over-year basis in 2015, construction demand in the EU is expected to accelerate by 2% to 3% in 2016. At the same time, automotive demand in Europe also remains strong.
According to IHS, the motor vehicle segment will grow by 1.7% from last year to top 21 million units of production this year. The increase in automotive production will be driven by higher sales in Western Europe, which will grow by 2.4% to 3% this year, due to the ongoing recovery in the domestic market along with exports to the U.S. market.
ArcelorMittal is already benefiting from the trade measures
The good part is that ArcelorMittal is already benefiting from the trade measures taken by the EU to slap duties on imports of cheap steel in recent times. For instance, in the first quarter of the year, the company's steel shipments to Europe rose 10.3% to 10.4 million tonnes on a sequential basis. More importantly, ArcelorMittal is looking to further improve its footprint in Europe to take advantage of the growing end-market.
The company is currently expanding its crude steel capacity to tap the growing demand for steel in construction and in automotive. For instance, ArcelorMittal is investing approximately €130 million in its upstream and downstream operations in Krakow this year. It will invest €40 million in the upstream segment in order to modernize the Basic Oxygen Furnace, apart from a €90 million investment for the expansion of its hot rolling mill and hot dip galvanizing capacity.
More specifically, these investments will enable ArcelorMittal to improve its hot rolling mill capacity by 0.9 million tonnes per annum, apart from increasing the hot dip galvanizing capacity by 0.4 million tonnes per annum. Both these plant expansions are expected to be completed by the end of this year, thereby allowing ArcelorMittal to quickly tap the end-market opportunity.
Given ArcelorMittal's recent moves and the favorable developments on the anti-dumping front, it is not surprising to see why the company's shares have rallied so impressively in the past couple of weeks. Looking ahead, as ArcelorMittal's products get more competitive on account of an extended investigation, it will be able to tap the demand in a better manner. As such, investors should continue to hold on to ArcelorMittal shares as its rally is expected to continue going forward.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.