ArcelorMittal lowers guidance amid weak demand
After managing to lower its debt in Q2, the steel producer expects it to increase in the second half of the year.
The lower sales and EBITDA figures were due to lower shipments and selling prices. Steel shipments fell year-over-year to 21.3 million tonnes from 21.7 million tonnes. ArcelorMittal reported overall net loss of $780 million compared to a profit of $1 billion in the second quarter of 2012.
For the last few months, the company has been concentrating on reducing its debt, selling off non-core assets, idling excess production capacity and cutting costs across divisions. It has already surpassed its debt reduction target for this year. This was essential because all major rating agencies had downgraded its debt rating to junk, increasing its cost of borrowing for capital intensive businesses.
The company lowered its EBITDA target in the face of weak demand even as it raised capital expenditure guidance slightly.
Performance across major segmentsFlat carbon steel shipments in North and South America in the second quarter of 2013 were 5.4 million tonnes, 2.7% lower than the first quarter of 2013. The decline was driven primarily by lower shipment volumes from the U.S. due to labor issues at Burns Harbor and operational incidents at Indiana Harbor East and West. Sales were $4.79 billion in the second quarter of 2013, an increase of 1.5% compared to $4.86 billion in the first quarter of 2013. Sales were higher due to lower shipments from the U.S. on account of issues mentioned above. This business segment contributed to around 25% of ArcelorMittal's revenues.
Steel shipments from the flat carbon Europe segment in the second quarter of 2013 were 7.1 million tonnes, an increase of 2.5% compared to 6.9 million tonnes in the first quarter of 2013. The marginally higher steel shipments were due to a mild pickup in demand following a seasonally weaker period. However, it doesn't mean that demand from the region has started recovering after the sovereign debt crisis. The marginally lower price of $830/tonne compared to the previous quarter's price of $831/tonne bears this out. This business segment contributed to about 35% of ArcelorMittal's revenues.
Long carbon Americas and Europe segment steel shipments in the second quarter of 2013 were 5.8 million tonnes, 7% higher compared to 5.4 million tonnes in the first quarter of 2013. Higher shipments were due to higher sales volumes in Europe (on account of seasonal factors), South America, Mexico and the tubular products segment. Sales in the quarter were also higher at $5.42 billion compared to the first quarter of 2013. This was on account of higher shipments despite weaker prices. The impact of prices was negative overall as the higher average steel selling prices in the Tubular and Americas businesses were outweighed by reduced prices in the European business. The share of this business segment in the company's revenues was around 25%.
Steps to reduce debt and boost profits
At the end of the second quarter, ArcelorMittal lowered its debt to $16.2 billion from the previous quarter's ending figure of $18 billion. The company is aiming to reduce net debt to below $15 billion in the medium term. This is the level of debt the company believes it can sustain at any point in the business cycle. This reduction is to be achieved through free cash flow generation and proceeds from M&A transactions.
ArcelorMittal has set itself an ambitious target of raising EBITDA per tonne of steel from $87 to $150 in the next two to three years. This is expected to be achieved through a combination of asset optimization, an increase in shipments, growth in the mining business, management gains and higher utilization rates at its facilities.
ArcelorMittal claimed that it would be able to boost its profits in the remaining part of 2013 through a 2% rise in steel shipments, a 20% rise in iron shipments and benefits from asset optimization plans and management gains initiatives.
The EBITDA target has been lowered from $7.1 billion to around $6.5 billion due to lower demand and iron ore prices than expected. Capital expenditure has been revised upwards slightly to $3.7 billion from the earlier target of $3.5 billion due to the increase in spending at ArcelorMittal Mines Canada and the restart of the company's Monlevade project.
Despite net debt coming down to $16.2 billion at end of the second quarter, it is again set to register an increase in the second half of the year due to an expected investment in working capital and payment of the annual dividend. Still, the medium term debt target of $15 billion remains unchanged.
The company expects demand from North America and the European Union to recover by around 40 million tonnes over the next five years. For 2013, it expects 3%-3.5% overall growth in demand. The highest growth is projected to occur in Brazil and China.
We have a price estimate for ArcelorMittal of $16, which will be revised shortly now that the earnings results are out.
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