Are the sparks flying again at ArcelorMittal? The world's biggest steel maker by production is a shadow of its former self: its shares have tumbled 80 per cent in five years. The group is addressing its troubling debt position, as is clear from Wednesday's annual results presentation. Now it needs to prove that the restructuring efforts it is undertaking to address chronic overcapacity and high costs in the steel industry in the U.S. and Europe are actually delivering results.
ArcelorMittal aims to cut its net debt from nearly $22-billion (U.S.) at the end of 2012 to $17-billion in the next six months after raising $4-billion of capital in January and selling a stake in its Canadian mining assets. That should take its ratio of net debt to earnings before interest, tax, depreciation and amortization down to 2.3, well below its debt covenant level of 3.5.
That is, of course, if the steel maker meets its 2013 EBITDA forecast, which is 3 per cent above its actual 2012 EBITDA of $7.1-billion. This would be a big improvement considering that $1.4-billion of 2012 earnings came from one-off gains.
ArcelorMittal says that much of its forecast earnings growth will come from volume gains – a 2 to 3 per cent rise in steel shipments and larger growth in iron ore shipments. But it is more vague about the level of margin improvement. That leaves investors guessing over whether its restructuring, through plant closures and cost-cutting measures, has gone far enough.
ArcelorMittal argues that capacity utilization at its steel plants will improve after the restructuring efforts, but that is only at its core operating facilities. Some plants will still remain idle. This suggests that the steel maker must do more to adjust to overcapacity concerns in the industry.
Europe produced 22 million tonnes of steel more than it consumed in 2012 – almost one-sixth of total production. And while consumption is growing this year, so too is capacity. Targets are one thing. But ArcelorMittal needs to show that its margins are improving before investors dive back in.