Steel giant ArcelorMittal (MT) formed a strategic partnership with China's Hunan Valin Group for the production of high-end steel products in China and iron ore purchases.
ArcelorMittal owns a stake in Valin Steel, the Shenzhen-listed unit of Valin Group. ArcelorMittal will help Valin Steel lower its production costs by sharing with the Chinese company its technical know-how.
The two companies will also move forward to explore the possibilities of establishing a long-term partnership to facilitate Valin Steel in purchasing iron ore, a key steelmaking ingredient, on the global market.
However, the Chinese government is not satisfied with ArcelorMittal, as it failed to fulfill its commitment of providing Valin with the technical support needed for their joint venture auto sheet plant as well as help for securing supplies of iron ore.
ArcelorMittal agreed to provide technical support for the Chinese steel mill and its subsidiary Lianyuan Steel, which will be responsible for producing hot-rolled coil as a raw material for the new sheet plant.
As part of its efforts to advance the tie-up, ArcelorMittal agreed to sell its 12% stake in an auto sheet joint venture with China's Baosteel and Japan's Nippon Steel to the Japanese firm to focus on the Valin project.
On July 27, ArcelorMittal announced its second-quarter 2011 results. It reported diluted net earnings of 99 cents per share in the second quarter of 2011, surpassing the Zacks Consensus Estimate of 94 cents, but fell below last year’s $1.13 per share.
Total steel shipments in the second quarter of 2011 were 22.2 million metric tonnes compared with 22.3 million metric tons in the year-ago quarter.
Quarterly revenues increased 24.7% year over year to $25.1 billion from $20.2 billion in the year-ago quarter and 13.3% sequentially. Sales were higher over the previous quarter primarily due to average steel selling prices (+10.9%). However, the results were slightly below the Zacks Consensus Estimate of $25.3 billion.
For the second half of 2011, management expects raw material accounting costs to increase sequentially. Due to the continued underlying demand recovery, steel shipments in the second half of 2011 are expected to be higher than the same period in 2010. Results of mining business are expected to further improve due to increased production and shipments.
For 2011, management continues to target a growth of 10% in iron ore production and an increase of 20% in coking coal production. Overall, group EBITDA per-tonne in the second half of 2011 is expected to exceed the level achieved in the same period of 2010.
The company’s full-year 2011 capital expenditure target increased by 10% to $5.5 billion (versus $3.3 billion in 2010) from $5.0 billion due to investments in the recently announced capacity expansions at the company’s Canadian mines, investments in energy saving projects (reinvesting the proceeds from the sale of carbon dioxide credits), Vega Do Sul investment in Brazil and expenses related to the study of the Liberia phase 2 expansion.
Major competitors of ArcelorMittal are United States Steel Corp. (X) and Tata Steel Limited.
We maintain our Outperform recommendation on ArcelorMittal with a Zacks #3 Rank (Hold) on the stock.
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