Must-read: Analyzing cost rationalization at ArcelorMittal

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Sep. 8 2014, Updated 12:00 p.m. ET

Cost rationalization at ArcelorMittal

ArcelorMittal (MT) has been running a cost optimization plan under the name “management gains program.” Under this program, it targets annual savings, wherein in both fixed and variable costs are controlled. Under the current program, it’s targeting savings of $3 billion by 2015. Fixed costs are expected to be around 25% of this total, while the remainder is variable costs.

The company has rationalized capital expenditure too, and the focus is more on maintaining existing plants than on expansions.

Improving leverage ratios for ArcelorMittal

We discussed earlier how the leverage ratios for ArcelorMittal deteriorated following the global financial crisis. Debt reduction has been one of the key focus areas for ArcelorMittal.

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The chart above shows the trends in leverage ratios for the company. As you can see, net debt levels have come down and stood at $17.1 billion at the end of Q2 2014. This is almost half of the net debt at the end of Q3 2008. Net debt to earnings before interest, depreciation, amortization, and taxes (or EBITDA) has also come down. It stood at 2.4 at the end of the second quarter of 2014.

Previously, we discussed the high leverage of ArcelorMittal as a reason behind its underperformance. ArcelorMittal’s management plans to reduce the net debt to $15 billion in the next few years. A further decrease in net debt, coupled with a relentless focus on cost rationalization, is expected to drive profits for ArcelorMittal.

Maintaining healthy leverage ratios is important for steel companies like ArcelorMittal (MT), U.S. Steel (X), Steel Dynamics (STLD), and Nucor (NUE). Please note that the SPDR S&P Metals and Mining ETF (XME) seeks to invest in these companies.

Next, we’ll analyze the current valuations for ArcelorMittal and see how it ranks compared to its peers.

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