Steel yourselves. Three months ago, things were looking up for ArcelorMittal as demand from carmakers and the industrial machinery sector seemed to be holding up in markets outside China. Earnings before interest, tax, depreciation and amortisation in the second quarter spiked to $3bn, almost 60 per cent up on the first three months. The company’s rebounding flat carbon steel business in the Americas contributed more than a third of ebitda. Now the world’s biggest steelmaker, a decent proxy for global economic output, has turned cautious on the outlook for demand, warning ebitda could fall by up to 30 per cent in the next quarter. Nippon Steel and Korea’s Posco have also flagged a deteriorating outlook.
China’s determined effort to cut surplus capacity is one reason for caution, uncertainty about Europe’s economic outlook another. Demand remains weak in the struggling economies of the eurozone’s periphery. Given such pressures, ArcelorMittal will struggle to pass on higher iron ore and coking coal costs. So far it has managed to stick higher costs on its contract customers – mostly in the automotive sector – which account for about a fifth of shipments. The spot market, accounting for the remaining 80 per cent, is an obvious concern. Self-sufficiency allows some flexibility: ArcelorMittal produces 50-60 per cent of its ore and coal needs. It has also (slightly) improved its ability to absorb steel price fluctuations by hitting a full-year fixed-cost reduction target two quarters ahead of schedule. Net debt to ebitda, at 2.4 times, is well within covenant ceilings.