ArcelorMittal Cuts Costs All The Way To Mongolia
ArcelorMittal is by far the largest producer of steel in the world, and is leaving no stone unturned to ensure it holds this position. Still, the company remains astutely focused on profitability. The company is making a push to reduce costs by achieving greater self-sufficiency in steel manufacturing input materials – namely iron ore and coking coal. ArcelorMittal, formed in 2006 by the merger of two steel giants (Arcelor and Mittal), competes with other international steel companies like BaoSteel, POSCO, Nippon Steel and Tata Steel.
Our price estimate for Arcelor Mittal stands at $40.67, implying a 10% premium to market price.
ArcelorMittal is a giant among giants…
ArcelorMittal produces over 100 million metric tons of steel annually and has operations in 20 countries on four continents. To give an idea of the company’s size, its steel output in recent years has been higher than the combined output of all three of its biggest competitors – BaoSteel, POSCO and Nippon Steel.
… and the bigger they are, the more they need to feed
Manufacturing such enormous quantities of steel requires ArcelorMittal to source a proportionally large amount of input materials. The steel manufacturing process uses iron ore pellets and metallurgical, or coking, coal – the price for both of which has grown substantially in recent years. Iron ore prices have almost doubled since 2004. [1] Similarly, metallurgical coal prices have more than tripled in the same period. [2]
This has prompted ArcelorMittal to push for increased self-sufficiency in both inputs, with plans to increase iron ore capacity to 100 million metric tons from below 60 million metric tons in 2010. [3] Similar expansion plans for coal capacity are also in the cards.
Recent developments support this strategy
ArcelorMittal recently announced that it has finalized its plan to acquire Baffinland. [4] The plans to acquire the Canadian company for $433 million were announced in late 2010, and could add 18 million tonnes of iron ore to ArcelorMittal’s capacity annually beginning 2016. [5]
More recently, ArcelorMittal was named among 6 companies shortlisted by the Mongolian government to develop the Tavan Tolgoi mine – one of the world’s largest unexplored coal reserves. [6] This could provide the company with 15 million tons of coal annually for more than 30 years.
What this means for the company’s value…
Lower input costs would result in better profit margins for ArcelorMittal for its global operations.
To illustrate this potential impact, we estimate that if the EBITDA margin for the company’s most valuable division – the long-carbon steels business – improves by only 2% from our current estimate of 20% by the end of our forecast period, it would imply 5% upside to our $40.67 price estimate for ArcelorMittal.
See our full analysis and $40.67 price estimate for ArcelorMittal
What this means for the company’s value…
Lower input costs would result in better profit margins for ArcelorMittal for its global operations.
To illustrate this potential impact, we estimate that if the EBITDA margin for the company’s most valuable division – the long-carbon steels business – improves by only 2% from our current estimate of 20% by the end of our forecast period, it would imply 5% upside to our $40.67 price estimate for ArcelorMittal.
Our price estimate for Arcelor Mittal stands at $40.67, implying a 10% premium to market price.
ArcelorMittal is a giant among giants…
ArcelorMittal produces over 100 million metric tons of steel annually and has operations in 20 countries on four continents. To give an idea of the company’s size, its steel output in recent years has been higher than the combined output of all three of its biggest competitors – BaoSteel, POSCO and Nippon Steel.
… and the bigger they are, the more they need to feed
Manufacturing such enormous quantities of steel requires ArcelorMittal to source a proportionally large amount of input materials. The steel manufacturing process uses iron ore pellets and metallurgical, or coking, coal – the price for both of which has grown substantially in recent years. Iron ore prices have almost doubled since 2004. [1] Similarly, metallurgical coal prices have more than tripled in the same period. [2]
This has prompted ArcelorMittal to push for increased self-sufficiency in both inputs, with plans to increase iron ore capacity to 100 million metric tons from below 60 million metric tons in 2010. [3] Similar expansion plans for coal capacity are also in the cards.
Recent developments support this strategy
ArcelorMittal recently announced that it has finalized its plan to acquire Baffinland. [4] The plans to acquire the Canadian company for $433 million were announced in late 2010, and could add 18 million tonnes of iron ore to ArcelorMittal’s capacity annually beginning 2016. [5]
More recently, ArcelorMittal was named among 6 companies shortlisted by the Mongolian government to develop the Tavan Tolgoi mine – one of the world’s largest unexplored coal reserves. [6] This could provide the company with 15 million tons of coal annually for more than 30 years.
What this means for the company’s value…
Lower input costs would result in better profit margins for ArcelorMittal for its global operations.
To illustrate this potential impact, we estimate that if the EBITDA margin for the company’s most valuable division – the long-carbon steels business – improves by only 2% from our current estimate of 20% by the end of our forecast period, it would imply 5% upside to our $40.67 price estimate for ArcelorMittal.
See our full analysis and $40.67 price estimate for ArcelorMittal
What this means for the company’s value…
Lower input costs would result in better profit margins for ArcelorMittal for its global operations.
To illustrate this potential impact, we estimate that if the EBITDA margin for the company’s most valuable division – the long-carbon steels business – improves by only 2% from our current estimate of 20% by the end of our forecast period, it would imply 5% upside to our $40.67 price estimate for ArcelorMittal.
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