Will Lag Pricing Help ArcelorMittal Ride High in 3Q16?



Lag pricing

Before we analyze whether lag pricing could be a tailwind for ArcelorMittal (MT) in 3Q16, let’s discuss a few terms. Steel companies such as U.S. Steel (X), Nucor (NUE), and AK Steel (AKS) sell their products in the spot market or under contract sales.

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Note that there are lead times before steel mills take spot orders and the steel is delivered to the buyers. Some of the metal that ArcelorMittal will ship in the spot market in 3Q16 was booked in 2Q16. During its 2Q16 earnings call, ArcelorMittal listed lag pricing as an “important support” for its earnings in the second half of the year. However, as noted in the previous part, lower shipments due to typical seasonal weakness would be a drag on ArcelorMittal’s 3Q16 earnings. With this background, let’s see what Wall Street analysts project for ArcelorMittal’s 3Q16 probability.

Analysts’ estimates

There are several metrics that you can use to measure a company’s profitability. However, for companies in the commodities space (DBC), EBITDA (earnings before interest, tax, depreciation, and amortization) is generally used. According to consensus estimates compiled by Bloomberg, ArcelorMittal is expected to post an EBITDA of ~$1.9 billion in 3Q16.

To put this in context, ArcelorMittal posted adjusted EBITDA of $1.8 billion in 2Q16 and ~$1.4 million in 3Q15. Analysts expect ArcelorMittal’s 3Q16 EBITDA to increase on a year-over-year basis and on a sequential quarterly basis.

In the next part, we’ll look at the key updates that markets would expect in ArcelorMittal’s 3Q16 earnings call.


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