Steel performance and outlook
Due to weak demand from auto manufacturers, the negative impact from trade conflicts amid countries and stagnant Eurozone economies, the price of a metric ton of steel tumbled 13% on the market in the past year to a price of 3,380.00 Chinese Yuan (about $483) at close on Wednesday.
The prices that we have seen so far in February are also the lowest since May 2017 as a result of the coronavirus outbreak in China, which is the world’s largest consumer of steel.
Steel producers will suffer a blow from the new coronavirus in China, but this shouldn’t last longer than the first quarter (or however long full-blown panic over the new virus lasts). Prices may recover somewhat if the Trump administration's plan to extend tariffs on the import of steel products goes into effect on Feb. 8 as scheduled.
ArcelorMittal
In order to take advantage from the expected recovery in steel prices, investors may want to consider purchasing shares of publicly traded steel manufacturers with little exposure to China, which for the above reasons creates some volatility concerns about its consumption and production of steel.
A good candidate for 2020 is ArcelorMittal (MT, Financial), a Luxembourg-based global steel manufacturer. The company is one of the biggest steel producers in the world, with assets in the Americas, Europe, Africa and Asia.
In 2019, the company shipped 84.5 million tons of steel, up 0.7% from 83.9 million tons in 2018, thanks to improvements in the company’s core markets. Shipments of market-priced iron were 37.1 million tons, down 1.3% from 37.6 million tons in 2018.
On the production side, the company reported a decline in crude steel (down nearly 2.9% year-over-year to 89.9 million tons) and in attributable iron ore (down 2.4% year-over-year to 57.1 million tons) due to a weaker demand following de-stocking.
ArcelorMittal saw earnings before interest, taxes, depreciation and amortization dropping 50% to $5.2 billion in 2019, determining an Ebitda margin rate of 7.4% of total sales of $70.615 billion.
Some factors should, however, improve its profitability, enabling the steelmaker to hit the target of only $7 billion in net debt before 2021, which will be value accretive for shareholders.
Stronger apparent steel consumption of flat products in the United States and Europe and more marked destocking of flat products in Brazil will improve the demand for steel in 2020. In China, the company's fundamentals are still not robust enough to move the domestic demand out of sluggish rates.
Joint venture in India
Further, the acquisition of Essar Steel India Limited, which ArcelorMittal will operate in a joint venture with Nippon Steel, reinforces the position of the company in a dynamic emerging market as the new entry covers more than half of the total steel demand in India. This share is projected to grow further as industrialization and urbanization in the country continue favoring steel products made by Essar Steel.
Wall Street recommendation
Wall Street is also positive on this stock, as it recommends an overweight rating for its shares with an average target price of $20.08 per unit, reflecting a 26% upside from Wednesday’s closing price of $15.94 per share.
The stock is not expensive as it trades below the 200-, 100- and 50-day simple moving average lines following a 30% decline in its share price over the last 52 weeks.
The stock has a market capitalization of $16.13 billion, a price-book ratio of 0.4 versus the industry median of 0.73 and an enterprise value-Ebitda ratio of 0.18 versus the industry median of 8.46.
The 52-week range is $12.53 to $24.24.
The stock has a trailing-12-month dividend yield of 1.25% and a forward dividend yield of 1.29% as of Feb. 5, 2020.
Disclosure: I have no positions in any security mentioned.
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