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Reasons To Buy:
ArcelorMittal should gain from its efforts to reduce debt, lower cost, expand capacity and improve efficiency. The company is also looking to sell its non-core assets to focus on key operations and expanding its steel product line.
ArcelorMittal has outperformed the Zacks categorized Steel-Producers industry over a year, supported by its efforts to reduce debt, lower costs, expand capacity and improve efficiency. The company's shares gained 33.2% over this period while the industry saw a gain of 19%.
ArcelorMittal is highly focused on reducing debt and lowering costs. These strategic moves are expected to lead to better operational performance in the long run. The company’s net debt declined by $4.6 billion on a year over year basis in 2016. Its debt reduction initiatives (including early bond repayment) led to lower net interest expenses for full-year 2016. ArcelorMittal sees further reduction in interest expenses on a year over year basis in 2017. The company also remains on track with its cost reduction actions under its Action 2020 program. The Action 2020 program includes plans to optimize costs and increase steel shipment volumes, along with improving the portfolio of high added value products. The program contributed $900 million to operating results in 2016 and is expected to make a healthy contribution in 2017. The company’s mining cash costs also declined 10% year over year in 2016. It is looking to keep the cash requirement of the business at or below its target of $5 billion in 2017.
The company plans to expand its steel-making capacity and raw materials self-sufficiency through a combination of brownfield growth, new greenfield projects and acquisition opportunities, mainly in the emerging markets. ArcelorMittal also recently announced that it is expanding its automotive steel line of products. The company said that it is expanding its global portfolio of automotive steels by launching a new generation of advanced high strength steels (AHSS). It is also planning to expand its family of third-generation advanced high strength steel. The launch of these steels is in sync with the company’s Action 2020 program that aims to achieve targeted financial improvements for the company by 2020. These products will ensure that the company is best positioned to meet customer requirements via a strong technical and product portfolio.
ArcelorMittal also remains committed to divest its non-core assets and increase focus on important operations. As part of this actions, the company sold its minority stake in automotive metals component company Gestamp in 2016, receiving around $1 billion in disposal proceeds. The company also sold its stake in Hunan Valin last year and received $165 million in proceeds from the transaction. ArcelorMittal also sold long steel producing subsidiaries in the U.S. (LaPlace and Vinton) and Zaragoza in Spain during 2016. These divestments helped the company reduce its net debt to around $11 billion at the end of 2016.
For ArcelorMittal, its mining segment is a significant advantage. It ensures security of raw materials supply to its steel business, enables the company to sell to a growing number of third party customers, allows optimization of supply and logistics savings as well as provides it with an effective hedge against raw material price movements.
Risks
The steel industry is affected by global production capacity and fluctuations in steel imports/exports and tariffs. Demand and pricing for steel remains weak. The world economy is still weak and the challenging conditions persist in Europe and emerging markets. Moreover, there is a demand-supply gap in the U.S. The slowdown in China is also affecting steel demand in that country. The company expects demand in China to be flat to down 1% in 2017. Soft construction activity in the U.S. and Europe remains another concern.
ArcelorMittal continues to contend with difficult economic environment, especially in its biggest markets Europe, where recovery remains constrained by high unemployment and weak credit growth. Its European business remains under pressure due to lower year-over-year average steel selling prices (as witnessed for full-year 2016). Steel demand in Europe is still well below pre-crisis levels. The recovery in the demand environment is expected to be sluggish in the region in the near term.
Cheap steel exports from China, which has built up a massive excess steel capacity, is still causing a problem. High levels of steel exports from the country amid soft domestic demand and a sluggish economy is affecting steel prices.