Lakshmi Mittal undeniably stands tall in the world steel industry with awe inspiring capacity under his belt. But, in spite of his trail blazing moves to consolidate steel-making capacity across the globe, ArcelorMittal, of which he is the largest controlling shareholder, is denied steel-price-fixing muscle of the kind enjoyed and unabashedly displayed by the world’s three largest miners.
This is because Vale, BHP Billiton and Rio Tinto among these control three-fourth of the global trade in iron ore. On its part, ArcelorMittal, with production of 73.2 million tonnes in 2009, had a share of 8 per cent of the world steel supply. That this is not enough to write at what prices steel products are to be sold at a particular point has become uncomfortably evident for ArcelorMittal and other steel makers in the wake of their being forced to accept an altogether new paradigm of iron ore and coking rates fixing.
Even then the world waited with great expectation to get guidance from Lakshmi Mittal as to how the industry, pressured by raw materials cost rises but not sure how much of that could be passed on to consumers, would fare in the rest of the year 2010. Unlike any other steel maker, ArcelorMittal has manufacturing presence in as many as 20 countries in four continents. Therefore, its working in any quarter will truthfully capture steel reality across the globe.
The company’s earnings before interest, tax, depreciation and amortisation (Ebitda) of $1.9 billion for the April ended first quarter might have fallen short of analysts’ expectation, but it nevertheless is a confirmation that the uncertain green shoots of late 2009 finally bloomed. This has led Mittal to say that the “economic recovery is continuing in line with our expectations and 2010 is set to be a stronger year for the company.” World Steel Association (WSA) is finding the global demand for the metal rising faster and sooner than expected. Mittal expects steel demand to rise 10 per cent this year.
At this stage, one is not sure about the first signs of recovery in Europe being sustained and improved upon in the coming months. And it is in Europe that ArcelorMittal has a little over 40 per cent of its capacity, and in spite of it owning some very large mines, its European mills for logistical constraints are dependent on external sources for iron ore. As steel-making costs are expected to rise quarter-on-quarter in the wake of minerals becoming more and more expensive, the competitiveness of some of ArcelorMittal European mills will no doubt be compromised.
It will be recalled that when the world steel production cuts were at their severest in the final quarter of 2008, bringing down capacity use to 71.6 per cent, the worst sufferers were the European mills, where capacity utilisation was a distressingly low at 53.1 per cent. The UK-based research group MEPS International says steel is selling at 36 per cent higher prices than a year ago. In step, WSA says there is robust growth in steel production in all regions, including Europe, in the first quarter of 2010. The unstoppable China is growing production by 25 per cent and India over 10 per cent. But, what should be heart-warming for ArcelorMittal is stellar production growth in North America and Europe.
Nippon Steel may not have impressed the market with its first quarterly profits, but steel makers in Japan are racing ahead with production growth on the back of economic revival. This improving environment for steel, largely due to to healthy offtake from automobile, white goods and heavy equipment sectors, must have weighed with ArcelorMittal in announcing that its second quarter Ebitda will rise nearly 60 per cent. Steel demand from the construction sector outside China still remains uninspiring. Beyond the current quarter, the industry’s margins will come under pressure when the impact of rapidly rising raw materials prices will be fully felt.
The Steel Authority of India Chairman Sushil Roongta has said earlier that the steel-making cost would rise by a third and the challenge for all steel makers, wherever they may be, was to pass on the incremental cost to buyers. To the extent that the industry is able to raise the efficiency level in steel-making and effect savings, the extra burden on consumers would be that much less, said Roongta. ArcelorMittal has engaged major contract consumes in discussion with the objective of making them bear all extra costs.
Mittal does not expect his buyers to be “happy” about the prospect, but at the same time he says “there is not much we can do about it.” When the miners defying all opposition have come to sell ore and coal based on a mix of spot prices and short-term index pricing, steel makers will be chary of offering steel on long-term contracts favoured by buyers to lock in prices of their final products. Expectedly, steel makers will now want contract buyers to accept quarterly price revisions.