Why ArcelorMittal can outperform its peers
ArcelorMittal (MT) gets more than half of its revenue from Europe. It’s important to note that although this segment contributes to 51% of revenues, the contribution to earnings before interest, taxes, depreciation, and amortization (or EBITDA) is only 23%. It’s a reflection of the slowdown in Europe. The European economy is coming out of its crises and key markets like the United Kingdom have led the way. A sustained recovery in Europe will be a key driver for ArcelorMittal.
Major consumers of steel on recovery path
Construction, machinery, and auto remain the three biggest consumers for steel. As we see in the previous graph, the outlook for these sectors is positive in the two largest markets for ArcelorMittal. It’s the biggest supplier to automotive companies globally. The higher growth rates for key consumers is a positive signal for the company. It’s expected to drive the performance going forward. Other steel producers like United States Steel Corporation (X), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS) and exchange-traded funds (or ETF’s) like the SPDR S&P Metals and Mining ETF (XME) are also expected to benefit from the recovery.
Relentless focus on cost cutting to benefit ArcelorMittal
ArcelorMittal has been running a cost optimization plan under the name “management gains program.” Under this program, it targets annual savings, where both fixed and variable costs are controlled. As you see in the previous chart, under the current program, it’s targeting savings of $3 billion by 2015. Fixed costs are expected to be around 25% of this while the remaining is variable costs. It has also rationalized the capital expenditure. The focus is more on maintaining the existing plants than on expansions. We’ll discuss how reduction in this capex has impacted ArcelorMittal in the next section in this series.