Morningstar | Each of ArcelorMittal's Steelmaking Segments Suffered Material Margin Compression YoY in 1Q
ArcelorMittal is off to a slow start in 2019, as first-quarter EBITDA fell 34% to $1.65 billion from the prior-year period. Although we anticipated that profits would fall off this year from cyclical peak market conditions in 2018, the magnitude of the decline in the first quarter took us by surprise. Steel-only EBITDA per ton declined to $56 from $101 year on year. Having updated our valuation model to reflect lower near-term profits, our fair value estimates fall to $17 and EUR 15 per share from $18 and EUR 16. Our long-term outlook is unchanged and our no-moat rating remains intact.Although soft steelmaking results were driven primarily by metal margin contraction, ArcelorMittal also cited highly unfavorable market conditions in Europe as a significant headwind. As a result, the company has temporarily idled 3 Mtpy of European steelmaking capacity and the ramp-up of ArcelorMittal Italia (the recently acquired ILVA assets) to a 6 Mpty annual run-rate has been delayed. Indeed, the Europe steelmaking segment generated a measly $11 million of operating income in the quarter, a 0.1% margin. This compares to $580 million in the prior year period, a 5.5% margin. As cost reductions take hold and reinvestment in the ILVA assets proceeds, we expect margins to rise modestly, even as global steel prices soften further. However, our midcycle operating margin assumption for the Europe segment is only 3%.
The bright spot for ArcelorMittal in the quarter was the performance of its mining segment. Driven primarily by elevated iron ore prices, operating margins expanded to 28%, up from 24% year on year. With iron ore prices now above $90 per metric ton, they are nearing a five-year high. This bodes well for near-term profits, although we remain bearish on long-term pricing. The fallout from the Vale dam collapse has temporarily taken a great deal of mining capacity off line for the review of safety measures but our long-term outlook for sizable capacity additions is unchanged.
ArcelorMittal is a steel company, based in Luxembourg, with operations in more than 60 countries. Co. is active in all major global steel markets, including automotive, construction, household appliances and packaging, as well as activities in Research & Development and technology, with captive supplies of raw materials and its own distribution network. Co. has an industrial presence in over 20 countries spanning four continents, covering key steel markets, from emerging to mature. Co. offers a complete spectrum of steel products from commodity steel to value-added products, from long products to flat, from standard to specialty products, from carbon steel to stainless steel and alloys.
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