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ArcelorMittal’s Outlook in 4Q15: Steeling Itself for the Worst?

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ArcelorMittal’s outlook from 4Q15

Previously in this series, we noted that ArcelorMittal (MT) has major upcoming debt maturities over the next two years. Another criterion for comparing a company’s leverage metrics would be its debt-to-current-market-capitalization.

In ArcelorMittal’s case, the ratio is more than two. Having financial liabilities, twice the market capitalization is a risky proposition. U.S. Steel Corporation (X) and AK Steel Holding (AKS) also have financial liabilities far more than their market capitalization. Together, AK Steel and Timken Steel (TMST) make up ~6.9% of the SPDR S&P Metals and Mining ETF (XME).

Now let’s evaluate ArcelorMittal’s outlook.

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EBITDA improvement

ArcelorMittal is planning to “structurally improve” its EBITDA (earnings before interest, taxes, depreciation, and amortization) by $1 billion in 2016. The chart above shows the breakup of these improvements. The company expects to realize one-third of these improvements in 1H16 and the remaining in the second half of 2016.

The company also plans to be free cash flow positive in 2015 as well as in 2016. Generating positive free cash flows will likely become crucial for ArcelorMittal, or else its leverage ratios could increase further.

Management outlook

While admitting that “operating environment has continued to deteriorate through the third quarter,” ArcelorMittal’s chair, Lakshmi N. Mittal, said that he did “not believe this challenging environment to be sustainable.”

However, spot steel prices have continued to deteriorate in over the past month. Historically, low spot steel and raw material prices have had negative impacts on ArcelorMittal’s contract sales as well, and a lot of these contracts are rolled over on a calendar year basis.

Falling iron ore

Falling iron ore prices could also mean that steel prices also stay lower. Falling iron ore prices would help lower the unit production costs for Chinese steel mills, a lot of which rely on seaborne iron ore. This would keep a lid on Chinese (FXI) as well as international steel prices.

But from where we stand today, in December 2015, calendar 2016 looks even more challenging for the steel industry than 2015 looked at this time last year. Previously, ArcelorMittal had hinted at asset sales to shore up its balance sheet. We could see some action on this front in the coming months if steel market conditions don’t improve.

Read Key for Investors: Steel Industry’s Outlook Keeps Getting Worse to find out more about the steel industry’s health.

You can also visit Market Realist’s Steel page to learn more about this industry.

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