Why ArcelorMittal could also be an iron ore play



ArcelorMittal’s iron ore mining operations

Previously in this series, we discussed ArcelorMittal’s steel operations. Another key aspect of ArcelorMittal’s business is mining. As we saw in the last part in this series, ArcelorMittal (MT) plans to decrease the mining costs. It will decrease the costs in order to stay competitive.

MT’s management wants to achieve a 7% reduction in mining costs in 2014—compared to last year. Will it be enough to tide over the challenges in its mining operations? Let’s discuss this now.

growth in mining

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Iron ore prices are in a free fall

Iron ore prices have been in a free fall. So far, they fell ~45% this year. This made other steelmakers—like US Steel (X)—slow their mining operations. Recently, US Steel stopped a planned expansion at one of its iron ore mines. Interestingly, other major iron ore plays—like Rio Tinto (RIO) and BHP Billiton (BHP)—are expanding their capacities. The SPDR S&P Metals and Mining ETF (XME) can give you diversified access to these companies.

This highlights a significant shift in the metal industry. According to analysts’ estimates, many iron ore mining operations won’t be viable if iron ore prices fall another 10%. This will drive producers away from the market.

At the same time, big producers continue to increase their production. This trend can also be seen in MT. The previous chart shows MT’s increasing iron ore production.

Why ArcelorMittal could also be an iron ore play

Now, MT is the fourth biggest mining company globally. This makes it a steel and iron ore play. While its steel operations benefited from the uptrend in demand, its mining operations suffered from the fall in iron ore prices.

How’s MT at a strategic disadvantage due to its mining operations? We’ll discuss this in the next part of the series.


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