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Why ArcelorMittal’s 1Q16 Earnings Were a Non-Event for Markets

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Part 5
Why ArcelorMittal’s 1Q16 Earnings Were a Non-Event for Markets PART 5 OF 5

1Q16 Call: ArcelorMittal Weighs In on the Steel Industry Outlook

1Q16 call

Previously in this series, we noted that ArcelorMittal (MT) didn’t revise its 2016 EBITDA (earnings before interest, taxes, depreciation, and amortization). According to MT, the company doesn’t want to mark to market its guidance every quarter. That seems a valid argument based on the volatility in commodity markets (FTGC). Plus, since several of MT’s automotive contracts have already rolled over, it won’t see the full impact of higher steel prices in fiscal 2016.

Let’s now also see what ArcelorMittal had to say about the steel industry’s outlook.

1Q16 Call: ArcelorMittal Weighs In on the Steel Industry Outlook

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Conditions improved

MT’s chairman, Lakshmi N. Mittal, said, “The market conditions have improved since we reported full year results in early February. Rising steel prices in China have supported prices globally and this has been further supported by the rebound in iron ore and steel scrap prices. In terms of the short-term demand outlook, for our core markets, this remains positive.” However, he also sounded a note of caution, adding, “Although the momentum is positive, the steel price environment remains fragile, particularly given the excess production capacity in China.”

A note of caution

Note that Chinese steel prices have risen substantially this year, as you can see in the graph above. Though Mittal acknowledged that the outlook for Chinese steel demand has improved, he sounded apprehensive on the steep rise in Chinese steel prices. Speaking on the rise in Chinese steel prices, Mittal said that the “overshooting of the price should not be taken as sustainable.” He also added that there could be some correction in Chinese steel prices.

We should note that a sustained recovery in the global steel industry would depend on how China acts on its commitment to cut excess capacity. Despite all of the Chinese leadership’s talk of cutting excess steel capacity, Chinese steel exports surged 8% year-over-year in 1Q16.

Steel overcapacity remains a big challenge for steelmakers, including Gerdau (GGB), POSCO (PKX), and Commercial Metals Company (CMC). You can read more about global steel overcapacity in Is the Steel Industry Really Turning Around?

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