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What Does the Correction in Iron Ore Prices Mean for ArcelorMittal?

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Mar. 16 2016, Updated 1:29 p.m. ET

Iron ore prices

Integrated operations have been one of the factors driving steel companies’ recent performances. Iron ore and coal mining fall under steel companies’ upstream operations. Steel companies such as ArcelorMittal (MT), U.S. Steel (X), Gerdau (GGB), and POSCO (PKX) have different degrees of vertical integration.

When raw materials such as 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 (GCC) are lower, vertically integrated steel companies are at a competitive disadvantage.

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Integrated producers

Last year, integrated steelmakers were under pressure due to falling iron ore prices. Lower iron ore prices meant that integrated steel producers were not able to enjoy the benefits of lower seaborne iron ore prices. ArcelorMittal’s mining segment has posted lower EBITDA (earnings before interest, taxes, depreciation, and amortization) in the recent quarters as can be seen in the graph above. Though the company has been working to reduce the unit production costs, the fall in iron ore prices was so severe that the cost savings were not able to fully offset the impact of lower iron ore prices.

ArcelorMittal

ArcelorMittal has outperformed some of the other steelmakers in the last couple of weeks. Some of this outperformance is also possibly due to the spike in iron ore prices. We could see weakness in MT if iron ore prices fall further. However, AK Steel might gain if the iron ore prices fall further. We’ll discuss more on this in the next part of the series.

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