ArcelorMittal and the economics of steel

The trading update from ArcelorMittal, yesterday, got tongues wagging and, for once, it was for good reason. ArcelorMittal’s HEPS is expected to improve by more than 100% for the year ended 31 December 2021.


After showing decade losses and crippling debt, the institutional investors tossed it in the pile of mounting penny stocks. As a retail investor, you really had to go scrounging around to find information and insight into the company, as most stopped reporting on it and previous annual reports painted a further depressing picture.


It was difficult to build an investment case for ArcelorMittal, until I realised the business model for ArcelorMittal is entirely linked to the PRICE of steel. Which price of steel? Let’s not go there…it is difficult to get answers from analysts…because it is complicated. 


Let’s stick to basics, Economics 101:


China is the largest producer of steel. 

Last year, China announced a total abolition of export rebates (13% on VAT) with effect from May 1 , 2021 on 146 steel products. The Chinese government wanted to reduce carbon emissions as their steel industry is a big polluter. This would curb the production of steel in China as domestic steel producers would focus on the domestic market and disincentivise them to produce more steel for the export market. On top of that, Russia imposed export duties on their steel exports resulting in their exports in steel declining resulting in the supply of steel contracting. 


With worldwide lockdowns, due to COVID, there was an increase of demand of goods. Steel is an input into many consumer products and packaging. I just have to think of what I put into my Checkers trolley to understand how much steel is used: KOO baked bean tins, formula tins, coffee tins etc.  Demand for steel increased across manufacturers sending steel prices soaring. With China and Russia cutting output and supply chain disruptions sent steel prices to all-time highs!


We know that in the same period iron ore prices cooled off. Iron ore, even though is an input of steel, demand for it is greater in an infrastructure centric economy. This has led to steel producers enjoying greater margins as input (iron ore) costs are lower and yet steel prices continue to ascend.


Enter the perfect timing of ArcelorMittal’s stunning turnaround, the high steel prices, to take advantage of the current demand, producing amazing results. I am looking forward to the results presentation on 10 February 2022 to understand this business better. 


Last note of caution, this is a cyclical business and its success or demise is linked to the demand and price of steel. 

Here is a one page overview of ArcelorMittal:

https://drive.google.com/file/d/1BbwvrlY9l05s-zXgnl72b_o4E0IMRoUl/view?usp=sharing


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