ArcelorMittal (NYSE:MT) was recently cleared by the European Union ( EU ) to buy Kokerei Prosper, the German coke producer. The European Commission stated that the deal does not significantly affect the competitiveness of the steel industry incumbents in the region in the medium-term and so could proceed. ArcelorMittal remains keenly focused on profitability pushing to reduce costs by achieving greater self-sufficiency in steel manufacturing input materials - namely iron ore and coking coal - and this clearance takes it one step closer to its goal. ArcelorMittal, formed in 2006 by the merger of two steel giants (Arcelor and Mittal), is by far the largest producer of steel in the world and competes with other international steel companies like BaoSteel, POSCO (NYSE:PKX), Nippon Steel, Tata Steel and U.S. Steel (NYSE:X).
Our price estimate for Arcelor Mittal stands at $41.15 , implying an over 20% premium to market price.
The motivation behind the deal…
ArcelorMittal announced its decision to acquire Kokerei Prosper from RAG Aktiengensellschaft in late November 2010. The deal was expected to complete in the first quarter of 2011, but delays pushed the actual transfer date to 1st June 2011. The Prosper plant can produce 2 million tonnes of coke annually, and will ensure "high quality, safe and sustainable supply of coke" to ArcelorMittal Bremen - a German subsidiary of the steel giant and a part of its Flat Carbon Europe division.
ArcelorMittal has been concentrating on reducing its input costs - a move triggered by the fact that prices of metallurgical coal prices have more than tripled since 2004.
… and will help improve margins
As ArcelorMittal moves steadily towards self-sufficiency in iron ore and coke, the company's margins are also set to improve at a similar rate. The addition of Kokerei Prosper to its portfolio will push margins for the company's Flat Carbon Europe division higher - representing an upside to our $41.15 price estimate for the company's stock.
Improving margins have an amplified impact on ArcelorMittal's share price. For instance, a 2% improvement in margins from our current estimates would mean a 6% upside to our price estimate.