Lower steel prices
In the previous part of this series, we saw that average steel prices dropped sharply in 4Q. This affected the profitability of all steel producers—including ArcelorMittal (MT), U.S. Steel (X), Steel Dynamics (STLD, and Nucor (NUE).
Lower steel prices have a negative impact on steel producers’ profits. Let’s see how ArcelorMittal was affected by lower steel prices.
The chart above shows ArcelorMittal’s earnings before interest, taxes, depreciation, and amortization (or EBITDA). As you can see, EBITDA has come down compared to 4Q 2013. EBITDA per ton has also come down over this period. The company’s profits could have been much lower, but ArcelorMittal’s focus on optimizing its operations helped it handle lower steel prices to some extent.
ArcelorMittal (MT) has been running a cost optimization plan called the Management Gains Program. Under this program, the company targets annual savings, controlling both fixed and variable costs. Under the current program, ArcelorMittal is targeting savings of $3 billion by 2015. The company’s fixed costs should be around 25% of this total, while the remainder should be variable costs.
ArcelorMittal has rationalized its capital expenditure also. Its focus here is more on maintaining existing plants than on expansions. As per ArcelorMittal, the company has realized cost savings of $ 2.1 billion in the last two years from the Management Gains Program.
Through a disciplined approach, U.S. Steel is working to strengthen its balance sheet, improving operational efficiency, optimizing supply chain, and rightsizing its operations. It has made some hard decisions as part of this exercise. Currently, U.S. Steel forms 2.86% of the SPDR S&P Metals and Mining ETF (XME).
In the next part of this series, we’ll analyze the 4Q financial performance of ArcelorMittal’s European operations.