ArcelorMittal

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

ArcelorMittal is a world-leading integrated steel and mining company, primarily focused on producing and selling a wide array of steel products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ArcelorMittal, often referred to as “MT” for its stock ticker, is a global steel and mining giant with a diverse portfolio and widespread operations. Their main business is producing and selling steel, but they also control numerous iron ore mines. It operates under diverse and ever-changing geopolitical landscapes and is impacted by many macro-economic conditions.

Business Overview

The company’s operations can be broadly categorized into two main areas: steel and mining.

  • Steel: ArcelorMittal is a major steel producer, offering a wide range of products including flat steel, long steel, and stainless steel used in various industries like automotive, construction, packaging, and machinery. They serve many industries with a variety of products using a number of production methods.
  • Mining: ArcelorMittal controls significant iron ore mines, providing it with raw materials for steel production. This integrated model is aimed at reducing reliance on external suppliers and controlling costs. It’s also very important to point out that all their mining operations are not just for iron, they produce other materials as well.

ArcelorMittal’s business model is structured around integrated steel production from raw materials to finished goods, encompassing mining, production, distribution, and processing. This enables them to have a cost advantage relative to many of their competitors.

Revenues Distribution

  • Geographic: ArcelorMittal operates in a globalized market with key markets in North America, Europe, South America, and Asia.
  • By Product: The company’s revenue is diversified across various steel products tailored to different applications including construction, automotive, packaging, machinery and appliances and, energy.
  • By Industry: ArcelorMittal’s customer base is diverse and spans several industries.
  • By segment: NAFTA, Europe, Brazil, and ACIS
  • Globalization: The steel industry is highly globalized, with companies operating and competing across borders. It is also highly cyclical.
  • Technological advancements: The industry is constantly evolving with innovations such as electric arc furnaces and new processing techniques designed to reduce emissions and improve production efficiency.
  • Environmental Concerns: There is an increasing emphasis on environmentally friendly steel production, which leads to higher costs for producers.
  • Government regulations: Government policy plays a role in regulations related to steel and in trade. Carbon tax initiatives may also place new costs to many businesses.
  • Supply Chains: Supply chains are increasingly strained due to geopolitical tensions. A lot of steel production is concentrated in select countries, leaving the companies that do not control their supply chain more prone to business volatility.

Competitive Landscape

ArcelorMittal faces fierce competition from other steel giants. Their main competitors are:

  • Domestic competitors: These include competitors in the main markets of MT that share the same region of influence and supply chain.
  • Global competitors: These are mostly foreign giants that often dominate steel production.
  • Substitute Materials: The company must be weary of the threat of substitute materials as they may take market share away from steel. These include concrete, wood, plastics, and aluminum.

Though there are many steel manufacturers, ArcelorMittal is usually better positioned due to its vertical integration (controlling mining assets), geographical coverage, size and expertise.

What Makes ArcelorMittal Different

  • Global scale and presence: ArcelorMittal has production facilities and a supply chain that spans the globe.
  • Vertical Integration: Having control over raw material operations is very lucrative for a business. This makes its operations more resilient to supply chain and raw material pressures.
  • Diverse portfolio: The diverse portfolio of products makes the company more resilient to shifts in the industry.
  • Experience: ArcelorMittal has a long-tenured history of operations and therefore, a large body of knowledge.

Financial Analysis

ArcelorMittal’s financials can be complex due to its widespread operations and the fluctuating nature of the steel industry. Here are some important things to note:

  • Cyclical Nature: Revenues can be volatile due to fluctuations in steel prices and the broader economy.
  • Margins: Their gross margin is quite strong, but their operating margin is more variable due to fluctuating prices.

  • Debt levels: Capital expenditures are large in steel and mining operations. It is vital to analyze this along with debt levels.

  • Reorganized financial statements: For better valuation purposes, their financial statements have to be reorganized. Reorganizing the balance sheet to create invested capital is vital, as is the calculation of net operating profit less adjusted taxes (NOPLAT) rather than traditional EBIT (earnings before interest and taxes). Finally, we must arrive at the free cash flow (FCF), which can be calculated from NOPLAT less Net Investment.
  • Returns on Invested Capital (ROIC): ROIC is the best measure of efficiency in which the company uses its capital to generate profit for shareholders. In ArcelorMittal, as is with many companies with cyclical industries, calculating ROIC will allow us to understand their long-term financial profitability.
  • Valuation: In ArcelorMittal, a discounted cash flow valuation is still the go to choice for the business valuation, because a company’s value is equal to the present value of all the cash the company is expected to generate over its lifetime. When valuing a company like ArcelorMittal, be sure to check the growth rate, the ROIC, and how management is planning to navigate the cyclical industry.

The company has a history of volatility in its profits and cash flows. This must be understood before investing.

Recent Concerns, Controversies, and Problems

  • Geopolitical Issues: Current geopolitical conflicts impact the company’s raw material prices, operations in Europe and Ukraine, and may contribute to overall volatility. These will impact future profitability.
  • Inflation: High inflation rates lead to higher costs for production and that must be counteracted by rising prices and more efficient operation.
  • Demand: There are varying levels of demand for different steel products. China’s recovery will help steel prices, but the company must be aware of market instability due to overcapacity and shifting consumption patterns.
  • EU regulations: A variety of new environmental regulations and carbon taxes in Europe will place new restrictions and new operating costs for their operations.

Management is actively trying to offset these headwinds through cost optimization, efficiency gains, and increased focus on value-added steel products. They are also focusing on vertical integration, especially for mines which are mostly located in places such as Brazil and Canada.

Moat Analysis

ArcelorMittal’s moat is a mixed bag. Here is a detailed breakdown:

  • Scale advantage: MT’s massive scale makes it hard to compete with them. This includes their enormous operational scale that reduces cost and their distribution networks.
  • Mining Assets: Their control over large iron ore mines is an economic moat. This allows it to control their supply chain.
  • Switching costs: They are low, as it is easy to switch steel suppliers. This makes it difficult to create long term customer loyalty.
  • Brand: ArcelorMittal has a decent brand for steel products, but it is not as powerful as in consumer brands.
  • Network Effect: This is largely absent for the company’s operations as it operates in a commodity industry.
  • Intangible Assets: Patents for steel fabrication, distribution, and mining methods help, but they don’t necessarily give the company long-term profitability, as they can be overcome by competitors with enough capital and effort.

Overall, it is debatable whether MT possesses a wide moat. However, their scale of operations gives them a strong competitive advantage. Their moat is best classified as narrow but durable.

Legitimate Risks That Could Harm the Moat

  • Price Volatility: The steel industry is cyclical, and prices can be quite volatile which can hurt earnings.
  • Technological disruptions: New methods for steelmaking can erode competitive advantages.
  • Government actions: Tariffs and trade policies will affect steel demand.
  • Global conflicts: These can impact raw materials prices and may damage infrastructure operations.
  • Labor Costs: Given their labor-intensive business model, the company is vulnerable to increasing labor costs as wages in the industry become higher.
  • Raw Material Costs: Although they control many of their mines, they must still be prepared for changing prices, especially in times of high inflation and strained supply chains.
  • Environmental Regulations: These policies can be expensive for companies to adapt to and may limit the growth of their production and their margins.

All of these risks can seriously impact profits and financial stability, but they are a natural part of the steel and mining industries.

Resilience

ArcelorMittal’s resilience comes from:

  • Its massive scale, enabling it to weather market volatility.
  • Its control of raw materials which protects against price swings.
  • Its efforts in innovation and cost cutting which further make them resilient to economic pressures.
  • Their global diversification which offsets regional risks.
  • Their commitment to reduce costs, and reduce their debt.

Despite these efforts, the company must be prepared for large swings and volatility in the industry.

Understandability: 4/5

While the core business of steel production and mining is relatively straightforward, its financial statements, and operational complexities make it somewhat challenging for an investor to fully grasp the business model.

Balance Sheet Health: 3/5

ArcelorMittal’s financial health is mixed. Their current ratio is over 1, which is good, and their debt-to-equity is at 0.8 which is okay. Given their low and volatile margins, and fluctuating prices, they should make it a priority to reduce their debt as the company’s profitability can fluctuate quite a lot from year to year, as they did in 2023. The management seems to acknowledge that, and is working to decrease their net debt, which has been reduced from 10B+ in 2020 to 2.7B at the end of 2023. A major concern is their goodwill on assets, and the impact that it may have on financial statements. The company must be wary of its cash flow, considering they must continually invest in improving their assets and buying new ones.