Heavy Decarbonization Costs And Protectionism Will Pressure Steel Margins For Years

Catalysts

About ArcelorMittal

ArcelorMittal is a global steel and mining company supplying steel products to automotive, construction, energy and infrastructure markets worldwide.

What are the underlying business or industry changes driving this perspective?

• Accelerating protectionist trade frameworks in Europe, North America and Brazil may lock in structurally higher input and compliance costs, compress steel spreads and limit future EBITDA and net margin expansion.
• Heavy multi year capital commitments to decarbonization, emissions compliance and asset modernization, including CO2 costs and ETS driven capex, could outpace incremental pricing power and dilute free cash flow conversion and return on capital employed.
• Expansions in Liberia, Hazira and Calvert, combined with already subdued global steel demand and persistent Chinese export pressure, raise the risk of oversupply in key product segments, which may cap realized prices and revenue growth through the cycle.
• Growing exposure to energy transition and high grade electrical steels may face slower adoption and policy delays than currently assumed, which could lead to underutilized premium capacity and weaker mix driven margin uplift in earnings.
• Reliance on ongoing government trade actions, quotas and antidumping measures in markets such as Europe, Brazil and Canada creates policy execution risk. If these measures are watered down or delayed, ArcelorMittal could be left with elevated cost structures and lower than expected profitability and cash generation.

Assumptions

This narrative explores a more pessimistic perspective on ArcelorMittal compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming ArcelorMittal's revenue will grow by 3.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.2% today to 6.0% in 3 years time.
• The bearish analysts expect earnings to reach $4.0 billion (and earnings per share of $5.36) by about December 2028, up from $2.6 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $6.2 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.3x on those 2028 earnings, down from 13.3x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 20.8x.
• The bearish analysts expect the number of shares outstanding to decline by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.18%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Structural margin improvement is already evident, with third quarter EBITDA per tonne at 111 dollars, around 25 percent above the company’s historical average even at what management views as the bottom of the cycle. This suggests that through cycle profitability could surprise on the upside and support stronger earnings and net margins over time.
• Large scale strategic growth projects and recently completed M&A are expected to deliver 2.1 billion dollars of medium term structural EBITDA uplift, with around 0.7 billion dollars captured this year and a further 800 million dollars targeted for 2026. Operating leverage from these investments could drive higher revenue and EBITDA than implied by a bearish view.
• Global and regional policy trends are moving toward stronger protection of domestic steel industries, including the European Commission’s new trade tool, CBAM in Europe, antidumping actions in Brazil and evolving frameworks in North America. Together these may support higher capacity utilization, firmer spreads and better net margins than assumed in a negative scenario.
• ArcelorMittal is increasingly leveraged to long term secular growth from the energy transition, automotive and infrastructure, investing in high quality electrical steels, renewable energy and expansions such as Liberia, Hazira and Calvert that are already ramping successfully. This could underpin sustained volume growth and a richer mix, lifting revenue and earnings over the long run.
• Disciplined capital allocation, including a dividend growing at a 16 percent compound rate over five years and repurchase of 38 percent of equity, combined with ongoing free cash flow generation and working capital discipline, can enhance per share metrics and shareholder returns. This may potentially support a higher share price despite cyclical headwinds through stronger earnings per share and free cash flow per share.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for ArcelorMittal is €27.31, which represents up to two standard deviations below the consensus price target of €36.88. This valuation is based on what can be assumed as the expectations of ArcelorMittal's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €44.51, and the most bearish reporting a price target of just €27.31.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $67.2 billion, earnings will come to $4.0 billion, and it would be trading on a PE ratio of 7.3x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of €38.42, the analyst price target of €27.31 is 40.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.