Key risks for ArcelorMittal investors
As you’ve seen in previous sections, Europe remains a key market for ArcelorMittal (MT). The market is showing signs of recovery, but any unexpected shock in the Euro Zone remains a key risk for the company. There has been recent political unrest in Ukraine. Russia supplies the majority of natural gas needs of Europe. A further escalation of crisis can lead to increases in natural gas prices in the region. Since a lot of fuel is consumed in steel making process, it can lead to an increase in input costs for steel producers.
Importance of past performance
Steel is a cyclical industry. It’s a sector that outperforms in a bull market, but is severely battered in a bearish market. ArcelorMittal has a beta of 1.28 which represents a greater risk as compared to broader markets, and a fluctuating dividend payout ratio—which is basically a reflection of volatility in earnings. The previous chart shows the share price movement of ArcelorMittal, which reflects the high volatility of the stock.
Lower realizations from mining assets
Mining is a high risk business. There are uncertainties about the amount and quality of minerals that can be found. Also, a lot of new mining assets are being discovered in high risk countries like Mozambique and Liberia. ArcelorMittal has an exposure to mining assets in Liberia. There are dual risk factors, one with the mining business and the second being a geopolitical risk associated with these countries. Last week, there was unrest at the mine, which led to security forces being called to defuse the situation.
Another risk is the softening of raw materials like Iron Ore. A backward integrated company like ArcelorMittal does not benefit from the fall in raw material prices. Because it owns the mining assets, it actually gets negatively impacted by the fall in prices. On the other hand companies which source their raw materials from third parties benefit, if input prices fall.
Why currency fluctuations impact the margins
The reporting currency for ArcelorMittal is U.S. dollars, but it gets its revenues in multiple currencies. It also has assets across the globe whose value gets impacted by the movement of local currencies versus the dollar. Appreciation of the dollar versus euro can positively impact the company by increasing the revenues in dollar terms.
Ownership structure represents a potential risk
ArcelorMittal is majorly owned by the founding Mittal family. While this has its own advantages, it also represents a risk to minority shareholders because their interests might be compromised by the majority shareholders. This is another risk factor that investors in the company must consider.
We have presented the overview for ArcelorMittal in this series. Other major U.S. listed steel companies are United States Steel Corporation (X), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS). Investors looking for exposure in the steel industry, can also consider ETF’s like SPDR S&P Metals and Mining ETF (XME)
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