ArcelorMittal Invests $369 Million in Vega Unit

steel plant

ArcelorMittal is the largest steel manufacturer in the world with a production capacity of 113 million tons with working 199,000 employees and an industrial presence in 18 countries including the United States. In addition ArcelorMittal has 14 mines in operation or development which make it one of the largest iron producers in the world is about to Invest $369 Million in Vega Unit.

Figures of a leader who, however, does not see the near horizon very clear and announced at the end of last May his will to reduce production so as not to lose profitability and face the turbulence that is coming in the sector. This announcement sank the stock price of the company, which reached a minimum of three years. In recent sessions, the value has recovered some land, but since last January the shares leave 13.6% of their value.

In the first quarter of 2019, the figures already showed the difficulty of the moment for the company. ArcelorMittal obtained a net profit of 369.7 million euros, which represents a 65% decrease compared to the same period of the previous year, in which it earned 1,192 million. In 2018, it earned 4,531 million euros, 12% more.

For Ivan San Felix, analyst of Renta 4, “the truth is that we are in a sector with excess capacity worldwide.” And he gives an example: “In 2000, China produced 5% of the world’s steel and now reaches 50%.”

ArcelorMittal sources in Spain explain several factors that are damaging the activity of steel. “The perfect storm has been created with a sharp rise in iron ore and extra-community steel imports, mainly with the arrival of a lot of material from Turkey to Europe.” China’s imports are already more controlled, but safeguard measures for the entry of steel from outside Europe are insufficient, they say.

Last week the European employer of the sector, Eurofer, published in the Financial Times article asking the European Commission for measures to stop this entry of steel. “These imports enter a time of market contraction at very low prices and are not subject to the cost of CO2 rights, which have skyrocketed from seven euros per ton to 25 euros.

The company also points to other factors, such as the cost of electricity, which is between 25% and 30% more expensive in Spain than in other European countries. “Thus, we will make a technical stop at our plant in Asturias in the month of October that will go from temporary to indefinite in the current situation,” say sources of the group.

The company has not given information on how it will affect employment. But it will not only be in Asturias. ArcelorMittal, chaired by Lakshmi Mittal, will reduce its primary steel production at its facilities in Dunkirk (Germany). Despite this contraction, the experts consulted are in favor of relativizing its impact on both the accounts and the evolution in the stock market.

Francisco Jose Rodriguez Sanchez, the analyst at Banco Sabadell, talks about the perfect storm that ArcelorMittal has to face. “The company has suffered a severe punishment on the stock market in the face of the bad panorama of the sector in Europe, where Arcelor obtains 40% of its operating result and the complicated moment of the automotive industry, industry where this company is leading. This has led them to the reduction of production, which makes perfect sense not to deteriorate their profitability. ”

The cause that the expert of Sabadell finds is the 40% rise in the price of iron so far this year, an increase that accelerated in May due to problems in Brazil after the rupture of a dam that affected the production of The signature Vale.

If costs are rising and prices cannot be passed on, the margins for ArcelorMittal are narrowing and the market is discounting this deterioration. But José Rodríguez believes that the market “sees a recession ad infinitum when it is more about a circumstantial situation, so we believe that the value is excessively penalized.”

A recent report by the rating firm Moody’s maintains its solvency note for ArcelorMittal in Baa3 (outside the junk bond), since its gross debt with respect to Ebitda is at 2.5 times, which ensures its current solvency. These experts would only empower your credit score if there is “a longer or more severe industrial slowdown.” The debt is one of the keys in the progress of the steel company, which has marked its reduction target to 6.2 billion euros.

At the end of the first quarter, the net debt stood at 9,874 million euros, compared to 9,026 million in December, due to the adaptation of IFRS 16 standards. If this new accounting were eliminated, the net debt would remain at 8,849 million euros, 177 million less than at the end of 2018.

Iván San Félix points out that it is a very cyclical sector and now the phase that the steel business is going through is not the most buoyant. “It is impacting the issue of US tariffs, which has diverted a lot of steel to Europe causing a price drop.” Of course, San Felix believes that the safeguard measures being taken by the European authority will take effect.

The difficult moment of the market coincides with a restructuring of Arcelor as a result of the purchase of a mega-factory in Italy, which is why the European Commission forced them to close six plants. “They have reduced production in Europe, their main market, and surely the typical maintenance stops will continue as in the case of Asturias.

They are forced to lower demand in the face of falling prices, and that is positive because it is now when it comes to defending that there is no further deterioration in prices, explains Iván San Félix, who also believes that value has been punished excessively in the market, drawing a worse picture than the real one. “It is clear that there is a lack of confidence in the sector,” he concludes.

In a report in the heat of the results of the first quarter of the year, Goldman Sachs expresses its confidence in an improvement of ArcelorMittal over the next few months, which will also have to be reflected sooner or later in the value of its shares.

Of course, this more favorable expectation will depend on data from China, the recovery of the price of steel and the fall of iron, which have risen abnormally in a context of falling metals in the world. Likewise, the evolution of imports and the progress of demand in the United States and in the European Union are configured as risks for the world’s largest steelmaker.

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