Shift in Global Steel Demand: Impact on ArcelorMittal
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Case Code: ECON084 Case Length: 10 Pages Period: 2017-2020 Pub Date: 2020 Teaching Note: Available |
Price: Rs.250 Organization : ArcelorMittal Industry : Metals & Mining Countries : India Themes: Micro Economics |
Abstract Case Intro 1 Excerpts
Introduction
On February 6, 2020, Luxembourg-based multinational steel manufacturing corporation ArcelorMittal S.A (ArcelorMittal) registered an increase of 10% 1 in its share price after reporting that its net debt had fallen to US$9.3 billion in 2019, thus presenting an optimistic outlook for steel demand in 2020. Since 2006, the global steel giant had grown rapidly through consolidation with a number of significant acquisitions, and become the world’s largest steel and mining company. Apart from concentrating on becoming a supplier of quality steel products in all major markets, ArcelorMittal also put considerable emphasis on growing its mining business.
Following two years of strong growth in 2017 and 2018, the global steel industry entered a slowdown in 2019. For the year 2019, while global steel production increased 3.4% year-over–year to reach 1,869.9 million metric tons, steel demand fell all over the world, except in China (See Exhibit I for Annual Crude Steel Production). In the rest of the world, steel demand dropped due to uncertainty, trade tensions, and geopolitical issues that had repercussions on investment and trade. Moreover, the poor performance of the manufacturing sector, particularly the auto industry, had brought down the demand for steel in many countries. ArcelorMittal also bore the brunt of the challenging environment the sector found itself in.
The market conditions in the first half of 2019 were tough, and ArcelorMittal's profitability suffered due to lower steel prices and higher raw material costs. After reporting a net loss of US$539 million for the third quarter of 2019 – its second consecutive quarterly loss in the year – the steelmaker cut its forecasts for steel demand in the US and Europe, its main markets. It said that contraction in steel demand in Europe would continue due to the sluggish auto sector and slowing construction. During the fourth quarter of 2019, market conditions remained challenging, leading to a slump in the company's sales revenue by 15.34% year-over-year and a widening of its net loss (See Exhibit II for ArcelorMittal’s Financial Highlights). For the year 2019, the company
reported a net loss of US$ 2.5 billion as against a profit of US$ 5.1 billion the previous year.
ArcelorMittal was optimistic about its growth and expected the global demand for steel to grow in its core markets in 2020, according to its strategy Action 2020. 4 The ambitious Action 2020 program aimed to ensure a cash flow positive for the company by 2020. According to Lakshmi Niwas Mittal (Mittal), chairman and CEO of ArcelorMittal, "2019 was a very tough year, clearly reflected in our significantly reduced profitability. However, our cash generation remained strong helping to reduce net debt to the lowest ever level. This demonstrates the contribution of our Action 2020 programme which was designed to ensure ArcelorMittal can be cash flow positive through all aspects of the steel cycle. We expect to make further deleveraging progress this year."
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