We maintain our Neutral recommendation on steel giant ArcelorMittal ( MT ). The company reported diluted net earnings of $0.19 per share in the third quarter of 2011, missing the Zacks Consensus Estimate of $0.51.
The company's revenues of $24.2 billion were down 3.6% sequentially, primarily resulting from lower average selling prices for steel (-1.7%) and lower volume of shipments (-4.9%).
Total steel shipments in the third quarter of 2011 were 21.1 million metric tonnes compared with 20.5 million metric tons in the year-ago quarter.
ArcelorMittal expects its steel shipments to decrease sequentially in the fourth quarter of 2011 due to economic uncertainties leading to customers adopting a "wait and see" approach. Higher iron ore and coal volumes will continue to be a positive underlying driver. The company's iron ore and coal production is expected to increase by 10% and 20%, respectively, by the end of 2011 as compared with 2010.
According to ArcelorMittal, the long-term growth potential in the emerging markets is strong, and therefore it intends to focus on its near-term growth capital expenditures. The company plans to expand its steel-making capacity and raw materials self-sufficiency through a combination of brownfield growth, new greenfield projects and acquisition opportunities, mainly in the emerging markets.
On November 18, 2011, ArcelorMittal inaugurated a new facility of Industeel Belgium for €28.7 million and included more than 90 companies and 500 workers. The new facility will have a production capacity of 100,000 tons of special plates for oil & gas, mining and other industries. The production lines have been running at full capacity since May 2011.
The investment in Industeel demonstrates ArcelorMittal's commitment of maintaining its leadership in the special steel plate market. This investment is further evidence of ArcelorMittal being at the forefront of innovation and new technologies with its commitment to health and safety.
However, the steel industry is affected by global production capacity and fluctuations in steel imports/exports and tariffs. Currently, China is the largest global steel producer by a large margin. Over the short-to-medium term, ArcelorMittal remains exposed to the risk of steel production increases in China and other markets, outstripping the increases in real demand, which may weigh on price recovery.
Steel prices are volatile, reflecting the highly cyclical nature of the global steel industry. Steel prices are also sensitive to developments in particular industries, such as the automotive, construction, appliance, machinery, equipment, infrastructure and transportation, which are the main markets for ArcelorMittal's products.
A resumed downturn in steel prices would materially and adversely affect the company's revenues and profitability, resulting from potential further write-downs of steel products and raw materials inventories.
The steel industry is highly competitive. Established producers expanding in new markets, smaller producers increasing production or exporters selling excess capacity from markets such as China could cause ArcelorMittal to lose market share, increase expenditures or reduce pricing. Any of these developments could have a material adverse impact on its business, financial condition, results of operations or prospects.
Major competitors of ArcelorMittal are United States Steel Corp . ( X ) and Tata Steel Limited.
We maintain our Neutral recommendation on ArcelorMittal with a Zacks #3 Rank (Hold) on the stock.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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