We have retained our Underperform recommendation on steel
) following its disappointing first-quarter 2013 results. Our
view reflects weak steel industry fundamentals and the tough
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ArcelorMittal turned to a loss in the first quarter, reported on
May 10, hurt by a double-digit decline in the top line. It
reported a net loss of $0.3 billion or 21 cents per share in the
quarter compared with a net income of $92 million or 6 cents per
share a year ago. Analysts polled by Zacks were expecting
earnings of 7 cents a share on an average.
Revenues slipped 13% year over year in the quarter as
ArcelorMittal had to contend with difficult economic environment,
especially in Europe. Steel shipments fell roughly 6% year over
year in the quarter.
ArcelorMittal remains affected by the challenging economic
conditions in Europe. It is also exposed to volatility in steel
pricing and tough competition and is still saddled with high
debt. Considering the challenging economic conditions,
ArcelorMittal has cut its annual dividend by roughly 73%.
Increased domestic imports, production ramp ups by peers and
increased Chinese production have led to oversupply in the
industry, which in turn, is causing a decline in steel prices.
The effect of price declines was witnessed across all segments in
the first quarter and led to a contraction in revenues.
Moreover, demand for steel remains weak. The world economy is
struggling and the challenging conditions persist in Europe.
Steel demand is currently roughly 30% below pre-crisis levels in
Europe. ArcelorMittal has closed its operations in Liege,
Belgium, and Florange, France, given slack demand and the weak
In addition, China's economy remains somewhat sluggish and there
is a demand-supply gap in the U.S. While construction activity is
improving of late in the U.S., it is still not inspiring. Energy
and other manufacturing sectors also remain sluggish. These may
hinder ArcelorMittal's earnings power moving ahead.
ArcelorMittal currently retains a Zacks Rank #4 (Sell).
Other Stocks to Consider
Other steel producers having a favorable Zacks Rank are
Shiloh Industries Inc.
Kobe Steel Ltd.
Angang Steel Company Limited
). While both Shiloh Industries and Kobe Steel hold a Zacks Rank
#1 (Strong Buy), Angang Steel retains a Zacks Rank #2 (Buy).