ArcelorMittal raises steel outlook as earnings exceed estimates

(Bloomberg) — ArcelorMittal SA raised its outlook for global steel demand after a record-breaking price rally marked the company’s best quarter since 2008.

Steel has surged in the past 12 months and has joined a broader commodity boom as producers struggled to meet an unexpectedly strong rebound in demand from the construction and manufacturing industries. After a decade of plant closures and job losses in Europe’s steel industry, demand from the infrastructure and renewable energy sectors is arousing optimism about the future, said ArcelorMittal Chief Executive Officer Aditya Mittal.

“Looking ahead, we see demand prospects improving further in the second half, so we have upgraded our steel consumption forecasts for the year,” Mittal said in a statement on Thursday.

The largest steel producer outside of China now expects steel demand in 2021 – a key barometer of economic growth – to increase by 7.5% to 8.5% year-on-year. In May, the company forecast that demand would be at or above the top end of its original forecast of 4.5% to 5.5%, after contracting in 2020.

Stronger performance enabled ArcelorMittal to increase shareholder returns. It announced a new $2.2 billion share repurchase program, funded in part by the sale of its U.S. operations in 2020, on top of the $2.8 billion returned to shareholders since September 2020.

“We assume that ArcelorMittal’s earnings improvement and earnings surprise is once again greater than its competitors,” said Ingo Schachel, head of equity research at Commerzbank AG. “The strong cash conversion and consistent cash allocation is impressive.”

Share profit

Second quarter earnings before interest, taxes, depreciation and amortization were $5.1 billion, ArcelorMittal said. That exceeded analyst estimates.

ArcelorMittal rose a whopping 5.2% in Amsterdam to its highest since May 2018, before rising 3.6% at 10:40 AM local time. Shares of the steelmaker are up 56% this year.

Supply restrictions and cuts in export subsidies in China, producer of more than half of the world’s steel, have raised hopes that the global overcapacity problems plaguing Western steelmakers will be less severe in the future.

“They no longer stimulate exports,” Mittal said during a conversation with reporters. “There are certain trends that have been different over the past 10 years that point to a more sustainable steel industry.”

Emissions targets

Still, the huge profits and shareholder returns of the steel trade cannot last. The industry – responsible for about 7% of global CO2 emissions – is facing an expensive road to net-zero emissions.

ArcelorMittal has set new emissions targets for 2030. That includes a 25% reduction in carbon emissions across the group, while increasing the target for its European operations to 35%. It is estimated to cost $10 billion, the company said.

For this transformation, the steel producer will seek support from the government. It recently signed a memorandum of understanding with the Spanish government to support half the cost of a $1 billion upgrade to establish a green steel plant in the north of the country.

“There are limited incentives for steel industry players to actually make these investments,” said Mittal, who took over the top job from his father Lakshmi early this year. “Without government support, it’s very difficult to actually motivate these changes.”

What Bloomberg Intelligence says

ArcelorMittal’s $2.2 billion repurchase announcement, earnings that exceed consensus and this year’s more optimistic outlook for global steel consumption may be enough to convince the market that the steel cycle is holding up. The combination could also be indicative of the company’s cash flow generation potential, which could be enough to drag the stock from their bottom line.”

— Grant Sporre, BI metals and metals analyst

Click here to read the full research note

(Updates with CEO comments in the penultimate paragraph)

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