Though steel as a marketable commodity has sustainable demand and consumption, it sometimes faces sluggishness in the market. The past 12 months of the steel magnate ArcelorMittal (MT, Financial) suggests that the industry has been facing some headwinds. The stock price has not only been volatile in the last 12 months but has actually dropped about 14%. As this Forbes article states, in trading on Wednesday, shares of ArcelorMittal entered into oversold territory, changing hands as low as $12.47 per share. Oversold territory is defined using the Relative Strength Index, or RSI, which is a technical analysis indicator used to measure momentum on a scale of zero to 100. A stock is considered oversold if the RSI reading falls below 30.
Slowdown in Europe and stake sale
On Wednesday, the company released a joint statement with Gerdau announcing that they have completed the sale of their respective 50% interests in Gallatin Steel to Nucor Corp. The sale was completed for a total cash consideration of $770 million. The deal is part of ArcelorMittal's plan to divest its non-core assets as the world's largest steel producer faces a slowdown in Europe which accounts for nearly half of its revenues.
ArcelorMittal has been facing a slowdown in its core operations in Europe, which accounts for almost half of its revenues. ArcelorMittal has faced downgrades from rating agencies in the past for its deteriorating financials. It has been running a program called the Management Gain Program, which aims at cutting costs. One of the key focus areas of this program has been a reduction of net debt to $15 billion. ArcelorMittal’s net debt stood at $17.4 billion at the end of the second quarter of 2014. This deal marks another step in ArcelorMittal’s stride towards a turnaround in its business.
Slow growth ahead?
As the Wall Street Journal reports, ArcelorMittal's mining business contributes in excess of 20% of its earnings, despite the fact that it accounts for just 7% of sales.
Unmistakably, ArcelorMittal is in a two-fold whammy situation. The company's higher-margin mining business is in a soup and will keep on remaining in a slide going ahead as iron metal valuing is expected to stay feeble. Furthermore, the prospects of the steel business may stay indeterminate.
Then again, while ArcelorMittal is resurgent in steel, the long-haul prospects seem uneven. Usage of steel in the car industry is declining, and this may deny ArcelorMittal a development opportunity. This year, auto sales across the globe are expected to rise to $85 million from around $82 million last year, as per IHS. The research firm forecasts that car sales will clock an impressive $100 million by 2018.
Thus, steel's loss will be aluminium’s gain, and ArcelorMittal stands to lose out on the car market's development.
In such circumstances, it becomes imperative for ArcelorMittal to focus on its strategy of cost improvement. At the same time, it is attempting to offset decreasing iron metal prices with aggressive generation. Case in point, it as of late extended its ability at ArcelorMittal Mines Canada to 24 million tons from 16 million tons last year. With this initiative, ArcelorMittal could accomplish a strong run rate for both in-nation creation and shipments.
Likewise, the organization has expansion plans in the pipeline. After the successful finish of phase one in its iron mineral extend in Liberia, it is progressing smoothly with the second phase expansion. The steel producer has gotten all the necessary clearances from nature's turf division, and it expects this undertaking to be finished before the end of 2015.
Takeaway
ArcelorMittal's net obligation (barring cash) stands at an enormous $17.4 billion. Also, administration has brought down it earnings standpoint for the whole year. The organization is confronting pressure in both steel and iron metal and the continued slowdown in Europe is definitely a cause of worry. In such a case, it is better off to stay away from creating a new position in the stock.
