The Tata Steel crisis
Tata Steel has decided to exit its UK operations after years of losses. ArcelorMittal (MT) is no stranger to the crisis facing the European steel industry. MT gets ~50% of its revenues from Europe, making it leveraged to any uptick in the European steel industry. With the crisis at Tata Steel UK, protectionism demands have started to echo across the EU (European Union) as well.
Protectionism in Europe?
We should note here that MT has so far lagged behind companies like U.S. Steel Corporation (X) and AK Steel (AKS) in 2016. This could partially be due to MT’s Europe exposure. If the EU clamps down on steel imports from the United States (VTI), companies with exposure to Europe should also gain.
Steel prices have improved in Europe as well as in other regions (see graph above). As a geographically diversified company, MT would stand to gain from improvements in global steel markets.
The iron ore scene
Meanwhile, although iron ore prices have lost some of their recent gains, they are still trading high on a year-to-date basis. As an integrated steel producer, MT stands to gain if iron ore prices trade higher. According to ArcelorMittal, the company has now brought down the cash flow break-even costs below $40 per metric ton. MT’s mining business will benefit if iron ore prices move to higher price levels.
MT faces significant annual debt maturities over the next couple of years. For now, however, the company has managed to raise cash through a rights issue. However, further equity issuance might only lead to earnings dilution.
Another risk that ArcelorMittal faces would be with concerns over “Brexit,” or the UK’s possible exit from the EU. Markets might not be totally factoring in the impact of Britain leaving the EU on the region’s economy. But one thing is certain: the 1Q16 earnings season will be crucial for steel companies in justifying their soaring valuations.
Keep visiting Market Realist’s Steel page for more developments in this industry.