Can ArcelorMittal Survive the Weakness?

ArcelorMittal (MT) announced second quarter ended June 30, 2016 net sales of $14.7 billion, up 10 percent sequentially from $13.4 billion in first quarter of 2016 but, down 13 percent year-over-year from $16.9 billion in second quarter of 2015.

ArcelorMittal declared second quarter of 2016 net income of $1.1 billion or $0.38 per basic share compared to a net loss of $416 million or $0.23 of basic loss per share in first quarter of 2016 and a 521 percent year-over-year expansion compared to a net income of $179 million or $0.10 per basic share in second quarter of 2015.

The global steelmaker reported continued year-over-year decline in its top line primarily driven by the ongoing weaker global commodity demand and pricing environment coupled with the rising operational expenditures, eating into the company’s key margins.

Smart moves  

ArcelorMittal has strategically reduced its sequential total debt position to $12.7 billion in second quarter of 2016 compared to $17.3 billion of total debt in first quarter of 2016 through well-planned cash proceeds of $0.1 billion received from the strategic sale of ArcelorMittal LaPlace and Vinton coupled with $1 billion of net proceeds from the tactical Gestamp sale.
Can ArcelorMittal Survive the Weakness?
Image by AnnaER / Pixabay
Importantly, the company has impressively grown its second quarter of 2016 average debt maturity to 7.1 years compared to just 2.6 years during third quarter of 2008.

The international steelmaking giant is consistently witnessing depressed global steel prices including, weaker scrap, coking coal and iron ore spot prices in addition to the consistently declining regional steel price HRC across China, Northern Europe and North America. However, the core raw material prices and steel prices have recently witnessed improvement and driven by slow but, steadily improving worldwide commodity demand and pricing environment. Further, the regional monthly inventory supply has also declined recently for the US and China as against growth in regional inventories witnessed for Brazil and Germany.

The ongoing cost-optimization efforts of ArcelorMittal by strategically selling off some non-core and high-cost steel producing facilities is believed to somewhat assist the company in surviving and emerging strongly from the ongoing global economic meltdown while allowing it to focus on its core operations to deliver sustainable long-term company growth and gradually offer attractive shareholder returns.

End-market conditions  

The economic growth in China has somewhat stabilized with the strategic support being offered by the state in form of well-planned growth investments. The country’s GDP growth became constant at over 6.7% year-over-year during the second quarter of 2016 and primarily driven by significant infrastructure investments, offsetting the weaker real estate expansion and slower corporate investments.

The industrial output has accelerated the growth pace to nearly 6.1% during the second quarter of 2016, a sequential increase from just 5.9% during the first quarter of 2016. Going forward, the production of crude steel is estimated to fall again during 2016, but somewhat lesser than earlier estimated with export volumes forecasted to be greater than estimated during the beginning of the fiscal year.

The worldwide Apparent Steel Consumption (ASC) rates for developing countries excluding China and for the developed nations is believed to remain significantly lower than global ASC rate for China during the second quarter of 2016 and since past several years. However, the worldwide ASC has grown significantly and sequentially during second quarter of 2016 and over first quarter of 2016 across all the key markets.

Going forward, the projected long-term slowdown in China is believed to significantly impact both the developed and developing countries globally with declining consumption demand for key commodities and poor pricing level.

Conclusion

Overall, the investors are advised to “Hold” their position in ArcelorMittal considering the company’s significant long-term growth prospects but, currently weaker financial position to support them with notable total debt of $15.14 billion against weaker total cash position of $2.29 billion only, restricting the company to continue with its daily operations profitably. The profit margin of -11.61% is disappointing and indicate no profit but loss.
Published on Sep 26, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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