Falling iron ore prices
Integrated operations have been one of the factors driving the recent performances of steel companies, and iron ore and coal mining fall under steel companies’ upstream operations. In this part of the series, we’ll explore how ArcelorMittal’s (MT) integrated operations are adding to its dismal performance.
How integrated operations work—and matter
It’s important to note that integrated operations are normal for steel companies. Other steel companies like Gerdau (GGB) and POSCO (PKX) also have vertically integrated operations. When raw materials like iron ore and coal are trading higher, steel companies that produce them through captive mines are at a competitive advantage. However, when the prices of these commodities are lower—as they currently are—vertically integrated steel companies are at a competitive disadvantage.
Iron ore in free fall, and what it means
Iron ore prices have been on a free fall, as can be seen in the graph above. And we should note that few analysts believe that iron ore prices will recover soon. The slowdown in the Chinese steel demand—coupled with relentless production increases by iron ore miners including BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE)—could mean that iron ore prices could stay lower for longer. Notably, BHP makes 4.1% of the SPDR S&P Global Natural Resources ETF (GNR).
ArcelorMittal has major iron ore mining operations and is among the top five mining companies globally. For investors, then, ArcelorMittal is a play on both the iron ore industry and the steel industry, which means that ArcelorMittal’s stock could continue to head south if iron ore prices continue to weaken.
Another major worry for investors in ArcelorMittal is the company’s huge debt pile. We’ll discuss this key investor concern further in the next part of our series.